A Weekly Chart Look at the 1987 Market Crash
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
Very nice post Corey. I totally agree with the confluence point, many look for a price point, where, IMHO, one should look for an area of resistance or support. Sometimes that area maybe quite wide, and that’s why many get stopped out of winners, short or long — their stops are too tight
and good point on MAs, they do not dictate the price movement, but define it, we need definition to understand subtext
Another point I forgot to mention, is that a study of momentum in that period would reveal serious negative divergence against price on weekly frames, those conditions should never be taken lightly especially for negative divergences.
It takes many buyers to bid something up, but for a fall, all it takes is absence of buyers, things fall on their own weight. So, I believe negative divergence are even more important than positive divergences
Of course, hindsight is 20/20, but one lesson I have learned is never to take a weekly or montyhly negative divergence lightly. well, as a trader, I even take the dailies seriously until they are negated
Hello Corey. Toward the end of your post you said there were more confluences at this level(the 220) but you wanted to highlight the 200 week SMA and the 61.8 Fib. Could you elaborate on the what the other confluences were? Thanks.
Piazzi,
True – one of my biggest problems early on was getting tagged so many times by stops that were too tight. I thought S/R was an exact number and that it couldn’t go beneath it – hence I was stopped out repeatedly until I started pushing the stop where I wasn’t comfortable… and it wasn’t tagged as much. It worked out edge-wise.
MAs to me define structure and I pay attention to their orientation. It’s not price always bounces off them, but they can provide clues to structure and low-risk entries.
Piazzi,
Yes, I didn’t take readers too carefully into the momentum readings because the chart was compressed. I just sort of pointed them out in passing.
I’ve learned to take divergences seriously as well – they can be important warning signals. I agree about your statement that negative divergences carry more weight – most chart patterns base their projections on the same assumption.
All divergences on all time frames give us clues. I don’t take signals purely off divergences but they are an important piece.
Dominick,
I slipped one in which was the 50 month EMA (monthly chart).
Index level 217 reflected the 423.6% Fibonacci extension target of the 337 to 309 “A” Corrective wave around August 1997.
219.35 was the 50% large-scale retracement of the 1982 bottom of 102 to the 336 top.
215.50 was the 50% large-scale retracement if you bumped us back to the 1980 low of 94 to the 336 top.
I’m guessing there could have been Gann projection or time targets there but I’m not well trained in Gann methods yet.
To me, the most important confluences came from Fibonacci and multiple-time period moving averages.
Cory,
Just trying to get an better feel for EW…. Is there a rule or principle that prevents wave 3 of 4 (SPX 300, Apr 87)) from being interpreted as a larger wave 5? The skeptic in me is saying that it’s called 3 of 4 because we have the benefit of hindsight knowing that the top occurs later. What quides a technician otherwise?
Corey,
Should we use the front month continuation numbers, or the techs of the specific month we’re trading?
For instance, in crude oil, the spreads move so much that moving averages can be quite different?
Thanks,
Jack
Bill,
That’s part of the trouble with Elliott. It’s – for me at least – quite difficult to project large-scale structures as they develop in real time. Hindsight helps us classify waves and build the current picture from there, but in real time it can be quite difficult and confusing. Notice I side-stepped the “larger wave” discussion, only noting that what we’re seeing here is a fractal of a larger pattern – which it was.
For me, I try to focus only on the next probable swing to the exclusion of all else. Is the next move likely to be up or down? And from that question I assemble as many pieces as I can and Elliott analysis is only ONE piece. I also try to have various current wave interpretations to see if there’s confluence from the wave counts.
To be honest, and taking us to the present, the Final large-scale 5th Wave – perhaps that began in 1980 – ended in 2000… though some Ellioticians see the 5th wave as yet to come (the 2000 – 2008 move was an “ABC” Correction that is making up the Large-scale 4th Wave with a big 5th yet to come).
Even that is disputed.
Focus on the next probable swing and try not to get caught up in the grand intricacies of TA.
Jack,
People go back and forth on that point but I generally use Continuous Contracts provided by TradeStation in doing long-term TA on commodities, though I really don’t do much of that. TS has its own formula of adjusting, while some prefer to do it different ways. There’s good and bad of each method and I would suggest to let your goal drive your means. I’m not an expert in this area so I would defer to others, but I’ve found TradeStation’s continuous contract structure to work decently for me.
Again, it’s sort of like how I analyze the DIA chart but trade using the current contract @YM to play out my analysis into potential profit. I don’t focus on the TA of the @YM except for minor confirmation/non-confirmation.