Anatomy of Waterfall Declines

In an article published in these pages in early March, I have discussed the similarities between the current chart pattern in the S&P 500 Index compared to the patterns that formed ahead of the crashes of 1929 and 1987, as well as the crash-like plunge in the Nikkei 225 Index in 1990. The following five similarities were decisive features of these crash patterns:

 

– a rally along a clearly discernible trendline on a linear chart

– an accelerated move toward a peak at the end of the advance

– an initial decline testing the trendline

– a counter-trend rebound

– a break of the trendline

 

After the trendline was broken, waterfall declines began in the three antecedents of 1929, 1987 and the Nikkei in 1990. In early March, I pointed out that the decisive development was the break of the trendline on the second test. What has happened since then?

 

A Waterfall Decline Threatens After the Trendline Break

This time the rebound from the initial test was a comparatively lengthy affair. However, prices ultimately retreated again and last Friday, March 23, the broad US stock market indeed broke through the trendline. Below is an updated three year daily chart of the S&P 500 Index with the trendline.

 

     S&P 500 Index: On Friday the trendline was broken (it was briefly regained on Monday, see  closing remarks on that point).

 

Obvious Similarities to 1929, 1987 and Japan in 1990

As a reminder, here are charts of the three antecedents for comparison (i.e., DJIA 1986-1987, 1928-1929 and Nikkei 1987-1990).

 

DJIA with trendline, 1986 – 1987: after the break of the trendline, prices declined rapidly.

 

DJIA 1928 – 1929: once again the market crashed after the second test of the trendline failed.

 

Nikkei 1987-1990: strong decline in prices after the trendline break

 

The similarities are astonishing: prices rise along the trendline, then the advance accelerates and peaks, the trendline survives an initial test and a rebound commences. A second test of the trendline fails, and after the indexes break through, a water-fall decline begins.

 

Trendline Break Approximately 50 Days After the Peak

With the break of the trendline last Friday the table showing the temporal distance between decisive turning points can be updated as well. The table shows the time between these points in calendar days after the respective market tops.

 The row designated “initial trend line test” shows the number of days that passed between the top and the first test of the trendline. 30 calendar days passed e.g. in 1929, in the current chart pattern only 13 days (market peak on January 26 2018, initial test of the trend line on February 8).

 

The next row, “peak of rebound”, shows the number of days that passed between the market peak until the end of the rebound following the first trendline test. This time there were two peaks, one after 31 days and another after 42 days, with the second peak slightly higher than the first. The rebound peaks were grouped closely together in all cases, as they were put in 37 – 42 days after the top.

The last row shows the day on which the break of the trendline took place. In the previous cases it happened 44 to 53 calendar days after the market had topped. With the break last Friday we are looking at 56 days in the current pattern. Once again the trendline breaks are grouped closely together in all cases.

 

Initial Target for the S&P 500 Index: 1,900

Another conspicuous feature of the three antecedents 1929, 1987 and Nikkei 1990 was also the similarity in the extent of the declines. In the first major wave down, prices fell to the starting points of the respective trendlines. Should a comparable waterfall decline once again be in the offing, the initial target for the S&P 500 Index would be 1,900 points, equivalent to a 34% loss from the top.

Thereafter, prices embarked on very different paths in the previous cases:

 

– after the crash of 1929, prices declined by almost 90% over the next 2.8 years

– in 1987, after a spectacular one-day loss of 22.61%, the market had put the worst behind it

– after the rapid decline of 1990, Japan’s stock market remained mired in a lengthy secular bear market that eventually bottomed after having lost 82 percent – almost 30 years after the top.

 

South Seas Bubble

In addition I wanted to show what happened in the famous South Seas Bubble of the early 18th century. While it is in many ways quite different from the modern-day examples discussed above, one can quite clearly discern a few interesting similarities: the rise along a trendline, an accelerated rally into the peak, followed by a waterfall plunge after the trendline was broken.

 


British stock prices 1719 – 1721 (an index constructed from three major stocks): after the break of the trendline, prices fell back all the way to the starting point of the bull market.

 

Elevated Crash Danger

With the recent trendline break, the pattern of the US stock market continues to look similar to that of the three crash antecedents. Other factors are of crucial importance for the stock market as well, such as its extreme fundamental overvaluation, rising interest rates and tensions over global trade.

 

Of course a crash is by no means certain or preordained, particularly the strong counter-trend move of Monday March 26 (which regained the trendline) does give us pause. However, since the initial rebound ended with a kind of double-top this time, perhaps there will also be two trendline breaks in close succession. Overall, there is now clearly an elevated probability that a waterfall decline lies ahead.

 

Chart and data sources: Bigcharts, Dow Jones, Nikkei, Larry Neal, author’s own calculations and charts

 

Dimitri Speck specializes in pattern recognition and trading systems development. He founded Seasonax, the company which created the Seasonax app for Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the old gold and silver fix in London. His commodities trading strategy Stay-C won awards all over Europe and was the best-performing quantitative commodities fund ever listed on a German exchange. For detailed information on the Seasonax app click here.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

3 Responses to “Trendline Broken: Similarities to 1929, 1987 and the Nikkei in 1990 Continue”

  • Hans:

    I am beginning to have serious doubts
    about the continuity of this bull market.

    Going to pare my positions.

  • RedQueenRace:

    I’m a daytrader so I don’t use trendlines.

    But I’ve looked at them and the question I always have is “How am I to know which one is important?” Multiple trendlines can be drawn.

    I assume that the further back within the current market cycle the trendline goes the more meaningful. On the Yahoo SPX chart, if I draw a trendline from the 2009 low it isn’t even close to being tagged (the tag point today looks to be around 2210, call it 2200-2225), much less violated.

    What is the significance of the trendline you have chosen?

  • killben:

    “Other factors are of crucial importance for the stock market as well, such as its extreme fundamental overvaluation, rising interest rates and tensions over global trade.”

    Add in central bank’s BS, EU and BoJ may not have the wherewithal to raise rates or reduce their BS, ZIRP and NIRP everywhere (except the Fed), central banks buying up equity like never before… you are likely in a time like never before. Waterfall with rocks beneath would probably describe it better!

    Will the central banksters watch the show from the sidelines? Unlikely! What will they do this time… Acronym money, QE4EVER, buy up everything under the sun. And we call this a free market!! Without this what could happen is anybody’s guess!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Stock Market Manias of the Past vs the Echo Bubble
      The Big Picture The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.   Who's who in the zoo in...
  • All the Makings of a Major Economic Fiasco
      Mud Wrestling: Trump vs. Xi About 6,940 miles west of Washington DC, and at roughly the same latitude, sits Beijing.  Within China’s massive capital city, sits the country's paramount leader, Xi Jinping.  According to Forbes, Xi is currently the most powerful and influential person in the world.   Papa Xi, the new emperor of China. [PT]   Xi, no doubt, is one savvy fellow.  He always knows the right things to say.  He offers the citizens of his nation the...
  • How the Global Trade Contraction Begins
    Historical Evidence The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup is upon us.   It was probably Putin's fault (just a wild guess) [PT]   From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come...
  • TARGET-2 Revisited
      Capital Flight vs. The Effect of QE Mish recently discussed the ever increasing imbalances of the euro zone's TARGET-2 payment system again in response to a few articles which played down  their significance. He followed this up with a nice plug for us by posting a comment we made on the subject. Here is a chart of the most recent data on TARGET-2 available from the ECB; we included the four largest balances, namely those of  Germany, Italy, Spain and the ECB itself.   The...
  • When the Freaks Run Wild
      Conditioned to Absurdity The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.   Francesco Lentini, the three-legged man. Born in Sicily in 1881 with “three legs, four feet, sixteen toes and two pair of functioning genitals” he made a career of...
  • Gold Sector – An Obscure Indicator Provides a Signal
    The Goldminbi In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.   Generally speaking bears have little to...
  • Separating Signal from Noise
      Claudio Grass in Conversation with Todd “Bubba” Horwitz Todd Horwitz is known as Bubba and is chief market strategist of  Bubba Trading.com. He is a regular contributor on Fox, CNBC, BNN, Kitco, and Bloomberg. He also hosts a daily podcast, ‘The Bubba Show.’ He is a 36-year member of the Chicago exchanges and was one of the original market makers in the SPX.   Todd “Bubba” Horwitz and Claudio Grass   Before you listen to the podcast, I would like to...
  • What Have You Done For Me Lately? Precious Metals Supply and Demand
      Aragorn's Law or the Mysterious Absence of the Mad Rush Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.   Answer: usually when it is too late... [PT]   Consider gold. Many people know they should own it. They...
  • The Midas Touch Gold Model
      Introductory Remarks by PT Dear readers, we are hereby beginning to publish material from a new author, Florian Grummes of Midas Touch Consulting. Some of you may already know Florian from his contributions to recent issues of the annual “In Gold We Trust” report by Incrementum. He is a well-known and highly respected market analyst (particularly of gold and cryptocurrency markets) in the German-speaking parts of the world and we hope we will be able to contribute a bit to making his...
  • An Inquiry into Austrian Investing: Profits, Protection and Pitfalls
    Incrementum Advisory Board Discussion Q3 2018 with Special Guest Kevin Duffy “From a marketing perspective it pays to be overconfident, especially in the short term. The higher your conviction the easier it will be to market your investment ideas. I think the Austrian School is at a disadvantage here because it’s more difficult to be confident about your qualitative predictions and even in terms of investment advice it is particularly difficult to be confident in these times because we...
  • Climbing the Milligram Ladder - Precious Metals Supply and Demand
    FRN Muscle Flexing Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver. It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.   Even the freaking leprechaun is now offering government scrip...  this really...
  • Introducing the Seasonax Web App
      Closing the Affordability Gap Up until recently, the Seasonax app was only available to users of Bloomberg or Reuters terminals, putting it out of reach of most non-institutional investors. This has now changed. A  HYPERLINK "https://app.seasonax.com/"web-based version has become available which anyone can use, and it comes at a much lower price point as well. When visiting the site where the app is hosted, this is the welcome screen:   Featured patterns at the Seasonax web app...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com