As a follow-up to the previous post on the 1987 Market Crash (on the daily chart), the following post creates an overview of the crash starting with 1984 and moving up to the crash, while looking at the perspective with an Elliott Wave impulse count.  Let’s see it.

S&P 500 Weekly Chart with Elliott Waves:

The market actually bottomed in 1982, but I’m showing a fractal of the larger move (remember Elliott Wave is comprised of many structural fractal waves that form the larger pattern).

We have a 5-wave internally valid structure that comprises the First Wave, which lasts from 1984 until mid 1985 that completed with a pullback to the 50 week EMA before finding support (notice the “ABC” corrective pattern that made up the 2nd Wave).

Price then rose steaily off this support zone to make new highs going into 1986 before forming another full Elliott Wave impulse that comprised the 3rd Wave that also lasted about one and a half years that terminated with an ABC “flat” correction at the 250 ’round number’ index support.

Price once again found support at the rising 50 week EMA before rallying sharply yet again into the final Five-Wave fractal impulse that terminated on a flat-line momentum divergence (not shown) into new price highs at the 330 level.  Notice again we have a complete five-wave internally valid impulse that comprised the 5th Wave.

After the fractal 5th wave completed the larger 5th wave (circled) Elliott pattern, price then retraced back to the rising 50 week EMA, found support (the “B” corrective wave)), then plunged without ceasing as price embarked on the destructive “C” Wave down.

From a technical perspective, stops should have been placed beneath the rising 20 EMA which would have been taken out, or also (more aggressively) beneath the rising 50 week EMA which also would have been taken out just before the large downside gap.  Trying to trade without stops would have resulted in the disastrous consequences that befell so many traders and investors at this time.  Again, direction is easier to forecast than magnitude.

Here’s where it gets most interesting to me.

Once we were in a free-fall, where was a logical target and/or support zone ahead for price?  Keep in mind that when the market fell as quickly as it did, people were in a panic to find supposed support, particularly because the decline developed out of a seemingly healthy technical (trend) position.

Price hit the rising 200 week SMA to the penny and nipped just beneath the 61.8% Fibonacci retracement (located at 220.23) of the move from the July 1984 lows to the August 1987 price highs.  A second ‘test’ of this level actually did hold precisely at the 61.8% Fibonacci level.

I would suggest that price targets are best set through *confluence* - meaning, the more methods that align near a certain price, the higher the probability that price will contain (support or resist) price.  Of course there were more confluences at this level, but I wanted to highlight the 200 week SMA and the 61.8% Fibonacci retracement as they are familiar reference points to most traders (note - the 50 Month EMA rested at 226 at this time, adding more weight to the ‘eerie’ confluence at the 220 level).

Price did find a bottom here and we’ve never seen 220 on the S&P 500 Index since this time.

Study this time period carefully for insights into price behavior so that you can be better prepared to react to similar developments in today’s markets when they arise.

Corey Rosenbloom
Afraid to Trade.com