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Technical Perspective on Some Bad Days: Crash of 1929, Black Monday 1987, and 9/11

Technical Perspective on Some Bad Days: Crash of 1929, Black Monday 1987, and 9/11
April 26
04:16 2012

Truly breathtaking drops in the stock market are graven into not just economic history but also the popular memory, since such events dominate the news and sound particularly dire to the vast majority of the public who have minimal understanding of financial markets. In the case of the three events we’ll consider here—the Crash of 1929, Black Monday 1987, and 9/11—one was followed by the Great Depression and another was merely a financial footnote to an unprecedented terrorist attack. As such, it’s easy to lose sight of the market’s longer-term movements both before and after the notable drops.

(Note that while the S&P 500 is a much broader index and therefore is—albeit arguably—a better indicator of the broader markets, only the Dow Jones Industrial Average was available for all three of these events, so it will be used for illustration.)

The DJIA chart for the Crash of 1929 is on a weekly scale given the duration of the event. In the inset (which is on a daily scale) you see the market just prior to the crash. It forms a head and shoulders pattern (left shoulder in August, head in September, right shoulder in mid-October) which is typically the prelude to a downturn—and in this case oh, what a downturn it was.

The index plunged from a high of 386.10 on September 3 to 195.35 on November 13, which is about 49%. The market bounced into the spring of 1930 to levels near its 1929 support, then entered a protracted decline to bottom at 40.56 in July 1932. Notice the consistent patterns from mid-1930 until mid-1932, in which a long decline bounces only weakly before turning into another long decline. In the end the market fell 89% from its peak.

The Black Monday chart is on a daily scale. Here we see a steady rise punctuated by minor corrections. In mid-September, the market actually broke briefly out of its channel, which should have indicated an upward turn.

Instead it corrected, bounced, and then broke below the support trendline over several days in mid-October. Then the plunge occurred. From the Thursday, October 15 close to the low on Tuesday, October 20, the market fell over 700 points or 31%. Starting on Wednesday, October 21, the index formed a symmetrical triangle into early December, with the breakout below the support line representing the end of the dead cat bounce. It would not be until mid-1989 that the DJIA recovered to its August 1987 highs.

The 9/11 chart is also on a daily scale. This event is unique because the financial markets were not opened on the day of the event, and in fact did not reopen until September 17.

The index was already in a decline after breaking out of a descending triangle that had formed in July and August, and when trading finally restarted, the Dow fell 685 points (7%). As you can see, it continued to fall after that, reaching its bottom on September 21. From there, however, it bounced and opened into a broadening top in October and early November, subsequently breaking out into a broader advance.

What is perhaps a bit scary about all three events was that there were no clear technical indicators of what was about to happen. 9/11, of course, stands on its own since its cause was purely external, but it is nevertheless interesting to see the recovery pattern after such an outside event. These are sobering reminders that for all the analysis that traders might do, there are still times when the markets will take us by surprise.

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