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What If the Crash Was Just a Panic Like 1987?


The DJIA has crossed 10,000 maybe 50 times since first breaching it in 1999.


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Do it again
Do It Again (The Beach Boys)

Is the market in another liquidity bubble like it was in 2003?

Bubbles don't breathe, they don't inhale, they just expand until they explode.

Is the market mirroring the relatively short-lived panics in 1987 or 1907, or is something more pernicious growing?

After the Long Term Capital Management debacle in 1998 caused a bailout and injection of nearly $4 billion on September 23 to avoid a wider collapse in the financial markets, another equity bubble emerged with a top 17 months later.

Are we doing it again?

It's noteworthy that on the decennial cycle, the September 1998 fiasco was followed by the Lehman debacle 10 years later in September 2008. It may be well worth watching the behavior in the first quarter of 2010 -- specifically March 2010, which will be 10 years from the March 2000 peak and 17 months from the October 2008 "internal low".

Are we doing it again?

And, if we are, what will the silver bullet be? Although sentiment has been fluffed up profoundly, what concerns me is that it may be a lot of smoke and little roast.

What if the current situation more closely mirrors the situation after the Crash in 1929?

Fed Chairman Ben Bernanke was an outstanding intellect when he was a professor at Princeton. Bernanke wrote the definitive study on the Great Depression. But the situation in the 1930s was a lot different than the situation today. For instance, back in the '30s, nobody worried about the dollar. What they worried about then was that they didn't have any dollars. But as far as a safe haven, during the '30s the dollar was it. The dollar was "as good as gold." If you didn't believe it, you could turn in your dollars for gold at any Federal Reserve Bank. -- Richard Russell

If we turn down again and the crisis has a second wind, where will the full faith and credit come from?

Has moral hazard been hazed in return for a semester or two of stock pranks, Bluto? Did the failure to save Lehman for $50 billion, which instead cost trillions to save the world financial system from imploding, create another bubble?

While the popular indices are far from their record highs, some stocks have made the return trip. It reminds me somewhat of the test failure of the March highs as September 2000 began with some of the leaders making all-time highs above their March record highs, leading many on the Street to conclude that all was well in Tape Town.

While trading profits among the banks bulge with money that's being redistributed from the many to the few -- not because they were just willing to assume more risk and more risk early but because they were in The NY Loop (as opposed to the Beltway) -- it feels something like a Robin Hood in Reverse meets Animal House, or Frankenstein Fleeces Abbott and Costello. It's worth noting that 60% of NYSE volume comes from HFT (high-frequency trading). Will Main Street trust Wall Street anytime soon to rush in to commit funds in what may be another bubble, again?

The Market: I always assumed the Big Gap from last year's Lehman Deluge would be filled -- just not here and now. I expected a deep correction, first with a higher low and then another rally back that exceeded the gap and made a higher high in the first quarter last year. That's what the cycles suggested. So much for scenarios. But now what, what happens now that the gap has been filled?

Will the other indices follow the NAZ, which filled its gap from 2008 and immediately extended? Anything is possible, but it's worth considering three things:

1. The NAZ never went to a new high after the 2002 low as did the other indices.
2. The NAZ hesitated below the level of the gap in June, pausing and mustering strength for an attack of the gap.

3. The March low on the NAZ was only marginally below its November 2008 low.

While the SPY is just $0.50 shy of filling the gap down from the fall of 2008, the NAZ is flirting with the level of the Rule of 4 Breakdown on its weekly chart, which coincides with a Backtest of its 200-week moving average. The two should provide massive resistance at the same time ebullience and 10,000 DJIA party hats have been taken out of the top drawer once again. Don't let those mothballs hit you in the eye. The DJIA has crossed 10,000 maybe 50 times since first breaching the digit in 1999.

If the Ascending Wedge on the S&P isn't bearish and the crash of 2008 was an isolated event and huge buying opportunity like 1987, what should be expected from the price action from here? What should we be looking for in the charts?

First of all it's worth mentioning that one year after the crash in 1987 the market was up just over 25%. It took 20 to 21 months for a 50% rally to unfold. Currently the S&P is up more than 50% in just seven months.

However, as to the price action, it may be worth watching for an overthrow, which is seen as a breakout by the bulls and a failure of the bearish pattern (point A) followed quickly by an undercut of the wedge, which is embraced by a confirmation of the bearish pattern by the bears. The third move was the genuine bias as the market moved higher with many in both the bear and bull camp being dislodged and scratching their heads. Kind of a big picture cha-cha-cha. 1987 style.

Trading Lessons:


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