Crash Signatures

If you have been a long term reader here you know that I have something called a 'Crash Signature.'

One of the key components of this is a significant decline from a new all time high, that rallies substantially so that the fear subsides and most believe there is a return to 'normal' bubble conditions.

Unfortunately, IF this is a rally that fails, in that it fails to set a new high, but tops out and then falls sharply again, we have a higher potential of a crash in which confidence is shattered and a new lower low is set.

I have a correspondent in France who also does trend tracking such as this. While I have normally been using a composite model of several crashes from US market history (1929, 1974, 1987, 2001, 2008) he is concentrating lately on a comparison to the year of 1937.

It should be noted that the 'crash' of 1937 pales in comparison to the Crash of 1929. And it was largely caused by an egregious policy error by the Fed.

If you look at it carefully it does follow the 'crash signature.'

Here is the latest chart which he has sent to me. I think if we fail once again to take out 'The Wall' on my SP 500 chart, and drop to a lower low, there will be a higher than normal probability of a 'crash.'

Although I have to add that we are in the days of organized support, and mobilization of the entire country's money mechanisms, to support stock prices for the benefit of their primary constituents.

The next few months could be memorable.

What Is Missing To Complete a 'Crash Signature' for 2018

"Life is a school of probability."

Walter Bagehot

Here is a little more to expand on the posting I made last night here.

We have had a long run up, with only a few corrections, to new all time highs.

The market has finally broken and corrected significantly.

You can see comparisons to 1929 and 1987 in the first chart below.

This was forwarded to me by a long time friend with whom I discuss these things.

As I suggested to him and attempted to show in the posting last night, what is required now is a break below the current low, decisively.

That takes the possibility of an inverse head and shoulders bottom off the table, and gives us the 'failed rally' scenario.

As you can see in 1929 there was a decline from the top of 17+ percent, followed by a rally back of 11+%, that nevertheless failed to make a new high, and rolled back over.

Once the new low was set, the market started its slide.

But I cannot stress enough that until and unless the inverse H&S bottom is taken out and a legitimate signature is given this remains a low probability event.

One issue in the current situation is the calendar. The Thanksgiving holiday is fast approaching.

This is traditionally a period of very light stock market volumes with a bias to a drift higher in preparation for the year end tape painting known as the Santa Claus rally.

Therefore timing is a bit of a headwind to the failed rally. It may require more of a 'trigger event' but that is very hard to forecast.

So let us be watchful for a market break lower here to a new low.

Crash 0f 2007 and Retracement From the Top

The US Equity Market Decline from the October 2007 Top on a Percentage Basis with Fibonacci Retracements.



The SP 500 Decline from the October 2007 Top Deflated by Gold in $US, with Fibonacci Retracements from the Point of Secondary Breakdown.