July 1st, 2010

A Stealth Market Crash

Market momentum is turning from bullish to bearish through a process that most technicians now concede is an emerging asymmetrical head-and-shoulder top chart pattern. However, conventional technical indicators like the Black Cross failed to warn us of the speed and severity early enough to become adequately defensive. What is hidden within that formation has been a stealth crash, a 16% decline over the mere 50 trading days since the April 23 peak of 1217.28.

But how common is a correction of that magnitude in such short of time? I scanned all the 50-day changes over the past nearly 50 years (since 1/1/62 exactly), or 12,212 total trading days, and discovered that the past 50 days ranks 188th worst period, or among the worst 1.6%! So if you have suffered since April, you can understand that the period we’ve been through is nearly unprecedented; there haven’t been very many 50-day stretches that have been this bad.

The past 10 weeks are comparable with which other periods? The worst was November 2008 when the market fell 40% in 50 trading days. The next worst was the crash of 1987 when the market convulsed 26.3% in three days. The rest were:

So if you’re feeling awful, hurt, violated and damaged then rest assured …. you have a right to feel that way. You have lived through 50 days that were just about as bad as any comparable period. In fact, the past 5 weeks was as bad as any of the Bear Markets and Crashes over the last 50 years. And we thought all that was happening was the formation of a head-and-shoulder chart pattern.

Is it over? Will it now rebound from an “oversold” position? Most of the previous declines continued over several trading days and this one in all likelihood won’t be any different.

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  • Anthony

    I wonder what the following 50 day periods of those "worst 50 day periods" look like…More of the same? or a correction rally?

    On a different note-any recommended reading for someone who wants to start at ground zero in learning about the the technical side of investing?

  • Joe

    I was wondering the same, Anthony, but I wanted to get this posted. If I come up with anything interesting I'll post it.

    If you send me your email address I'll send you a draft copy of the book I've been working on for a couple of years.