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Stock Market Crashes: A Technical Timeline

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Could last week's mini-crash be a precursor to market conditions that unleashed the dark periods in 1929, 1987, 2000, and 2007?

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"We learn wisdom from failure much more than from success. We often discover what will do, by finding out what will not do; and probably he who never made a mistake never made a discovery."
--Samuel Smiles

Could last week's mini-crash be a precursor to market conditions that unleashed the dark periods in 1929, 1987, 2000, and 2007?

Let's engage in time travel and analyze these markets one by one.

1929-1933

I talked about dissimilarities about this time in September 2009 in This Isn't Déjà Vu of 1930.

Here's an updated look.

In 1930, the index hadn't taken out its 200-day moving average in spite of the rally. The Golden Cross (50-day MA crossing above the 200-day MA) also didn't occur in the 1930 rally.

Both of these technically important events occurred in 1932. (See chart below.)



2008-May 13, 2010


Following the low of March 2009, the conquest of the 200-day MA and the Golden Cross occurred in June-July 2009. (See chart below.)



1999-2000

Even though the bull-market high was made in March 2000, the market was stuck in a volatile and choppy pattern, even attempting to reach the March highs in Sept. It languished around the important 200-day MA support for months. However, there were serious divergences lurking in other sectors/indexes such as Semiconductors and NASDAQ by September 2000.

That was the start of the bear market.



May 2010


This year, the April highs in the S&P 500 Index were confirmed by almost all major indexes and most technical indicators. There have been two trysts with the 200-day MA; the rebound from the first one led to new highs. The second one was as a consequence of a sharp correction which is in the process of playing out.



Price Action Leading to 1987




Market Internals in 1987

"Love does not consist of gazing at each other, but in looking together in the same direction."
-- Antoine de Saint-Exupery

In 1987, there were clear divergences in the market internals. Here's the simple indicator: the Advance-Decline line that had peaked in March 1987. Even though the broader market rallied substantially, this indicator failed to confirm the market rally, as evidenced by the lower high and further deterioration prior to the market crash. The broader market continued to head higher until August, despite these weakening market internals.



Market Internals in 2007

"Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgment, repeated every day."
-- Jim Rohn



It's quite clear from the charts above that there was a significant divergence in market internals in 2007 even as the market made incremental new highs, which ultimately marked the peak of the bull market.
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