I think we need to keep an open mind about at least the possibility of a crash type move coming up the next week or two. There was an article on the safe haven website talking about a price pattern comparison between the 1987 SP500 and the Current Dow Transports. I have been studying the two charts and I do see the striking similarity.
But there is more to the story than just the simple comparison. I see evident ALL OVER THE PLACE broadening topping patterns which is a specific and rare price chart pattern that is highlighted in the technical analysis of stock trends book by Edwards and Magee. In my opinion the most crucial element of these patterns are the fact that they are very bearish topping patterns and the nature of the price decline down out of these patterns.
There are a few examples in the book that show severe price plunges out of this type of pattern and I think it is important to consider this as a possibility for the current market. The hard part of any decline is predicting the NATURE of the decline. How fast will it be, slow and choppy? or vertical spikes with fast consolidations. Based on everything I am looking at now I can see us at least having a chance of doing near vertical down with a speed which could surprise most people.
There is still too much complacency and everyone is still numb from the Amazon Google and Microsoft Earnings. And yet some of the economic numbers coming out lately are less than bullish. If we do enter into crash mode it will likely be almost impossible to position oneself for such an event. The decline that occurred in October of last year, while severe was still somewhat orderly. So could it be part II is the more severe type decline that catches people completely off guard?
The nature of the price decline during the next month or two is going to be very key in determining if we are in a super bear 1929 to 1933 scenario OR instead a more lame 1975 normal slow 15% correction scenario and then eventual resumption higher next year.
IF we get a severe shock type price decline now that is rapid and relentless, it will be a big hint that we are going into a scenario of 1929 to 1933 where we keep breaking down below the March lows and continue into a perma bear until mid 2011.
I really think the next few months of price action are going to answer this question and I am just going to have to wait and see to find out!
Below is the chart comparison:
