Happy Fourth of July.
As we celebrate our independence here in the US, many forget to reflect upon the significance of holiday events and dismiss the chronological order of events that are significant in history. As a trader, I'm always looking for an edge over the guy on the other side. To see what he doesn't! So before I break out the BBQ and fireworks, I decided I needed to be a historian and study other Bear markets in an attempt to create a working model for future price.
I began my research by reading an article on the Crash of 1929 and the Great Depression. I have taken some excerpts from it and highlighted many similarities to what I believe is unfolding 81 years later. Draw your own conclusions; keep an open mind as the price projections are quite unimaginable to a modern day investor/trader. Remember,stock market crashes are a social phenomena combined with economic events and crowd (the herd) psychology. These patterns repeat but do not always manifest themselves exactly the same.
The October 1929 crash came during a
period of declining real estate values in the United States. The psychological effects of the crash reverberated across the nation as business became aware of
difficulties in securing capital markets investments for new projects and expansions. Business uncertainty naturally affects job security for employees, and as the American worker (the consumer) faced uncertainty with regards to income, naturally, the propensity to consume declined. The decline in stock prices caused bankruptcies and severe macroeconomic difficulties including contraction of credit, business closures, firing of workers, bank failures,decline of the money supply, and other economic depressing events. The resultant rise of mass unemployment is seen as a result of the crash, although the crash is by no means the sole event that contributed to the depression. The Wall Street Crash is usually seen as having the greatest impact on the events that followed and therefore is widely regarded as signaling the downward economic slide that initiated the Great Depression.
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Other Similarities
Wall Street bankers met to find a solution to the panic and chaos. Bids to purchase a large block of shares in "blue chip" stocks were deployed. This tactic was similar to a tactic that ended the Panic of 1907, and are currently being used today by the Federal Reserve and Treasury. History shows that these efforts are temporary at best.
At the time of the Crash, the prospects for passage of the
Smoot–Hawley Tariff Act was then being debated in Congress. The Act, proposed the raising of tariff taxes on 20,000 US imported goods. Economists later concluded that the large swings of price prior to Black Tuesday were a result of uncertainty created by the passage of this Act. In my opinion, the Obama Administration's Health Care and Banking Reform bills carry equal weight with investors.
If prosperity defined the "Roaring 20's" as more than just an economic condition, could we not argue that prosperity is a "state of mind? If so, the Crash signified a change in psychology.
Given these similarities and the fact that psychology plays a huge role in financial markets, I decided to use the Crash of 1929 as a working model for the period of 10/2007 to present. From the chart of the cash S&P from 1929-1932, I've compared the magnitude of decline to that of 2007- present.
Magnitude of Decline
1929-1932
- The total decline from 1929-1932 was 87%.
- Wave b retraced 61.8 % of wave a.
2007-present
- Wave a and b are 64 times greater in magnitude as their counterparts in 1929-1932.
- Wave b retraced 61% of wave a.
- Total decline - still unfolding
Potential Support Levels
So far the analysis has revealed a similar retracement of the b wave. By using the magnitude of decline from 1929-1932 (87%), along with Fibonacci Ratio Analysis we can project the termination of wave c.
Fibonacci Ratio Analysis
The following information represent termination points of wave c using an expanded flat interpretation or the alternative count, a zig zag, not show, whereas III, purple, circle ended where b, green is designated and 1 is a and 2 is b). See chart below. The calculations are:
Expanded Flat:
- wave c=.618 (wave a) past wave a @299.58
- wave c= .618 wave a @ 283.97
- wave c =1.618 wave a @307.19
Zig- Zag:
- wave c= wave a @ 310.5
- wave c=.618 (wave a) past wave a @ 104.84
- wave c= .618 wave a @ 657.85
- wave c =1.618 wave a @ (251.45) - excluded negative number
Magnitude of Drop Analysis
If the crash of 1929 ended in a 87% decline, what would a decline of parity be equivalent to today? If wave III ended on 3/2000 @ 1552.87, then wave c would terminate at 201.87. If wave III ended on 10/2007 @ 1576.09 then wave c would terminate at 204.89.
But is looking at an event of parity realistic, given the parabolic rise from 12/74 to 12/2000? Probably not given that the current waves are 64 times as large! Case in point, parabolic rises produce unsustainable prices at market tops that usually lead to dramatic collapses in the oppositedirection. Another excellent example is Crude Oil (2007 and 2008).
For argument sake, lets look at a 90% decline to see how a few extra percentage points effect the termination points. If wave III ended on 3/2000, a 90% decline terminates at 155.29. If wave III ended on 10/2007, then wave c terminates at 157.61. There may be other multiples of decline that agree with support provided by previous 4th waves but this analysis doesn't take those into consideration. Should they be warranted, they can be addressed at that time.
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ConclusionsThe following chart shows bands of support drawn from my research. Use them as a general guide as price structure continues to unfold. As in any long term analysis, these projections will play out over years, not months. Certain events may force us to change or reconsider our viewpoint and strategies. When and if applicable, I will do so.
Best of Trading!
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