I decided to look at the 2008 price decline and see how it looked as compared to the current decline phase in 2011. There appears to be some similarities. Making comparisons between precious pieces of market action to a certain degree is ‘junk science’ because 99% of the time each period has very different variables that are present.
I have done pattern comparisons to the 1987 crash several times and also to the 1929 period and I do not recall one that played out exactly the same. The exception is the 1998 period where I noticed a similar pattern in 1929 that resulted in the big drop in July 1998, but it was very short lived.
The problem with market comparisons is that the stage of a market decline has a lot to do with the ability of the market to fall apart quickly or slowly. We do know that the current market has working into a major sell mode because of a very large monthly bearish divergence in the sp500 versus the MACD histogram. This is a Class C bearish divergence on the monthly scale and explains the recent crash type action. Crashes usually occur from bearish divergences and can lead to persistent selling that is relentless.
The fact that this bearish divergence is on the monthly scale likely means that the length of the selling or crash type action is likely to last for several weeks or a full month and a half (as opposed to the May 6, 2010 flash crash which will likely pale in comparison).
I will go into the 2008 and 2011 comparison at the end of this posting.
A Few Observations on the Recent Decline
The most interesting aspect of the recent decline has been its speed and character. We have seen several increasingly large MARIBUZU price candlesticks that clearly show the sellers are in full control and want to continue to take control.
It suggests to me that even if we do get a very aggressive snap back rally in the market to the upside next week, it will quite likely be overtaken by selling forces in short order. Bear market rallies are famous for being very sharp and very fast. They are designed that way to provide maximum doubt to those who are bearish the market and to discourage them as much as possible.
I would not be surprised to see some huge gathering (a dog and pony show) of world leaders this Monday from the USA and Europe about some big ‘pumping operation’ they will invoke to keep the markets stable. Such a meeting or statement or action from world leaders including the Fed might be good enough to pump up the markets very strongly for 1 to 3 days similar to what occurred in the 2008 period.
But keep in mind that if this does occur, it will simply serve the purpose of RESETTING the oversold indicators (ie. Relative Strength Index) and providing a new platform for massive future selling.
A Broadening Top
Peter Brandt pointed out that the Nasdaq 100 Index has formed what appears to be a broadening top. This is a potentially very bearish pattern and has historically led to the 1929 crash and the 1987 crash. In the 1929 case it was a cascading type of crash.
So far the NDX 100 looks like it is on track for a break down similar to the 1929 crash style decline. So we could be in for a full 4 to 6 weeks of seemingly endless crash style type action.
This is about as picture perfect broadening top as any technician can ask for. Thanks to Peter Brandt for pointing it out, excellent observation.
If you look in the Edwards and Magee book on Technical analysis of Stock Trends he provides an example of a stock that also had a picture perfect broadening top and shows the follow on action.
So it seems quite clear that broadening top patterns are to be taken very seriously.
The volume of the recent declines to kick start the current drop are consistent with this being the real deal. This decline is kick started and it will take more than just all the kings horses and all the kings men to stop it.
2008 and 2011 Comparison
Here is the 2008 to 2011 comparison. This is just a highly speculative forecast based on what occurred in the 2008 period. If it plays out very close to that time period (unlikely) then it could suggest that the sp500 will be near 860 by early September 2011.
I will let the picture do the talking below.
If the pattern stays the same then it would mean that we will likely see a very sharp and large rally up towards 1295 in the sp500 early next week. The rally could be so large and fast that it would scare all but a handful of bears…
It will be interesting to see if the market can create such a rally.
Note on the chart that this first portion of decline has been about the same percentage as the 2008 rally before the short covering rally. The following piece of price destruction if repeated in the sp500 for the rest of August could send the market to about 860 to mark the final low price point. I say ‘low price point’ meaning that it would mark the ‘major chunk’ of the price decline. Afterwards things could get messy with all kinds of counter trend rallies and confusing swing trading ranges.
Whether or not such a decline can occur in such a short time frame is hard to imagine at this point. But I do remember that during the 2008 crash I thought the decline was finished on October 3, 2008 because of the big intra day reversal. But then it dropped another 260 S&P points from there.
Another reason why this decline may be invalid is because the 2008 portion was the LAST portion of the decline since 2007 when the market was already in full sell mode.
In the 2011 time frame we have major patterns such as head and shoulders and broadening tops that are causing the market to rumble down. I don’t know which argument is stronger at this point, the maturity of the decline (2008) versus two large bearish price patterns (2011)?
The bottom line is that we will see lower prices. It is just a matter of how and how soon we get there…