October 20th, 2011

A Scary Anologue Seldom Mentioned

According to Dictionary.com, an “analogue” is a noun meaning: something having analogy to something else.

Chartists are prone to mine historical data in search of precedents, patterns that closely resemble the current market believing that by projecting forward from those historical reference points they will come up with the performance that might be mimicked in the current future.

I think I’ve found an analogue that is amazingly close to the present, frighteningly so. Take a look at the following chart (click on image to enlarge):

I intentionally deleted any date references so that you’ll focus on the following:

  1. The market completed an imperfect head-and-shoulder reversal top; the right shoulder was small so the pattern could have easily been considered a double-top
  2. Moving Averages in perfect Bearish Alignment
  3. After crossing below the neckline, the market traded in a narrow, 3-4 month range
  4. However!
    1. the 50-dma reversed and
    2. the Index exited the range and crossed above all but 300-dma
  5. Volume peaked twice as the market declined to form the lower boundary of the channel after which volume appeared to evaporate

Now compare that to a chart of the market today:

The similarities are eerie and uncanny. I’ve notated the similarities on the above chart of today’s market.

Have you guessed what period the first chart covered? Unfortunately it was February 2007 to May 2008, a period that was the precursor of the recent Financial Crisis Crash. Just on the other side of the first chart above, the market crashed over 50% between May 2008 and March 2009!

In no way am I predicting that we’re on the doorstep of another crash. What I am suggesting is that you should take all the uplifting talk by Cramer and the other “talking heads” on the air and in print with a large dose of skepticism. The market may hinge on agreement in a European bailout financing plan and a continuation of favorable earnings reports here. Those point may be preconditions to assume that the market already hit a low for the year and the bull market can resume.

I think I’ll just wait, however, because if we had bought when we heard the same sort of talk as we entered our own bank and financial system emergency then we would have lost more than half and still had not recovered all our money. Rather than trust the professionals, I’m going to let the market tell me when it’s o.k. to put my money back to work.

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  • 1leone

    Thank you for this

    If indeed we are following this script, do you feel we're at the equivalent of the April top of 2007 and therefore due for a retest of the 200ma 1170/50 (roughly) or are we already in the up phase for the rest of the year?

  • Joe

    No one can say for sure whether we will follow the script or not. But the similarity is uncanny. My guess is that right now we're at about the same point as we were in May 2008.

    My guess is that we'll see a downdraft which could carry the market down to the 925-950 area between now and early next year.

    If, however, the market is able to gain enough strength to cross above the 1250-1275 area then we will have dodged the bullet triggering a new assault on the old all-time high.

  • nandanshah

    I thought you may find this "Analogue" interesting and would like to hear your thoughts on it:

    http://marketthoughtsandanalysis.blogspot.com/2011/10/interesting-parallel.html

  • Anonymous

    There is so much bearishness out there right now. So much concern and doubt about Europe. So many people on the sidelines just waiting. Lots of fear. Maybe not a bad time to be long?

  • Anonymous

    libor is very different 2008 & now