Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Stocks Bear Market Uncanny Parallels to 1929 Crash

Stock-Markets / Stocks Bear Market Feb 25, 2009 - 07:33 AM GMT

By: MoneyWeek

Stock-Markets Best Financial Markets Analysis ArticleThe stock market crash of 2008 played out like 1929 almost to the day. In fact the pattern was so uncannily close, that I became convinced the post-crash rebound would do the same and we would see a similar spring bounce.

That hasn't happened. After a brief rally into 2009, the markets have ground lower. But now they are at key levels. A breakdown from here and things are going to get even nastier – if such a thing were possible...

The uncanny parallels between 2008 and 1929

Let's take a look first at the repeating pattern of stock market crashes. My thanks to Bob Hoye of Institutional Advisers for the table. You can see the similarities are amazing:

Moreover, the percentage declines were virtually identical. An initial decline from the high to a late October low of about 40%, then a rebound of about 15%, followed by a final low in late November – down about another 22%. The parallels are uncanny.

The worrying thing for today's investors is that the final low after 1929 did not come until three years later; after 1873 it did not arrive until four years later. Given that modern markets made their peak in mid-2007 it is not unreasonable to expect the eventual low to come no earlier than 2010-11.

What is a double top and why is it so important?, the website of lauded technical analyst John Murphy, defines a ‘ Double Top ' as follows: ‘a major reversal pattern that forms after an extended uptrend. As its name implies, the pattern is made up of two consecutive peaks that are roughly equal, with a moderate trough in-between'.

The thinking behind the double top (and indeed its opposite, the double bottom) is that the market reaches a point where there are no more buyers, only sellers. It falls, then retests that point, and when there are still no more buyers, it reverses. The FTSE 100 – and every other major index – put in a clear double top in 2007 (just as they did in 2000) and it signalled a significant change in trend (see chart below):

FTSE 100 chart

That is just a weekly chart for the last five years. What is worrying, however, is if you look at the bigger picture. The major indices have put in a mammoth, long-term double top. Here is a chart of the S&P since 1970. You can see it very clearly in the chart below – in 2007, at the 2000 highs, the markets ran out of buyers:

S&P 500 weekly chart 

But you can also see, the market is now retesting those 2002-3 lows. They were first tested in November 2008 and we got a rally. Now they're being retested again (see below):

Gold price chart

This really is a key juncture for the stock markets. If these lows hold, we could be marking an important bottom (although I have no doubt this will be retested).

But if we break down below these lows, we're going back to test 1996 prices (600 on the S&P) and possibly even 1994 prices (S&P around 450). These current lows will then mark an important point of resistance that will slow any future bull markets (in other words, when markets rise again, the current lows will be where they start to falter).

On the positive side, Bloomberg reported this week that Elliot Wave International's Robert Prechter, a notorious bear and practitioner of ‘Wave theory', has advised his clients to cover their shorts (bets that the market will fall). He first recommended that his clients short US stocks in 2007, saying that “aggressive speculators should return to a fully leveraged short position.” But Prechter wrote to his clients this week, saying that “the market is compressed. When it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late.”

My own thinking is that we will see some kind of support and possibly even a rally from the mid-700s. But, longer-term, this bear market is far from over.

And what about gold?

Prechter has been right about a lot of things – deflation being one of them – but he has not been right on gold. A strong deflationist, he has been bearish on the metal. But we are rapidly learning that gold is first and foremost a monetary metal – and as money is the best asset to own during deflation, it's actually doing rather well.

Now, I hope that Prechter remains wrong. But the worrying thing for gold investors now is that gold, too, is putting in a double top.

S&P 500 monthly chart since 1970

$1,000 an ounce was such an obvious place for gold to hit resistance. As I wrote in last week's Money Morning , it made sense to take some money off the table. I remain convinced of gold's long-term future, but it looks like we are in the early stages of an intermediate correction.

I suppose a 50% retracement of the gains since October is not an unreasonable target. That would take us back to the $850 area. (It would also give us a superbly bullish, inverted head-and-shoulders pattern – more on that another day). I said in my new year predictions in MoneyWeek that a retest of $1,000 was likely in the first part of the year, but that gold would not break through $1,000 until next autumn or winter. We still seem to be on course for that. For now though, the late February to March seasonal correction for gold (see chart below) is playing out to the script:

Gold 37 year average chart

I couldn't bring myself to sell any gold or any of my preferred gold stocks, so instead the way I played this was to buy some puts (options that bet the price will go down) on SLV (the silver ETF), and GDX (the gold stocks ETF). It's been a good trade so far.

By Dominic Frisby for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules