Trendline Broken: Similarities to 1929, 1987 and the Nikkei in 1990 Continue

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 Large Cap Index, Apr 2015 - Mar 2018

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

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).

Dow Jones, Apr 1986 - Nov 1987

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

Dow Jones, Jan 1928 - Aug 1929

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

Nikkei Jun 1987 - Jul 1990

- Click to enlarge

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 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.

USA Calendar Days After the Peak, 1929 - 2018

The row designated “initial trend line test” shows the number of days that passed between the top and the first test of the trendline. - Click to enlarge

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).

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 18^th 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

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. - Click to enlarge