Amazing Similarities in Dow Jones 1937 and Today

Mar 2, 2009: 2:15 PM CST

In charting, sometimes past is prologue.  There is a distinctly eerie similarity in the 5-Wave decline from the October 2007 highs today with what happened – almost identically – as the Dow peaked in early 1937 and bottomed out in April 1938.  It’s something you probably should examine, as it could resolve the same way today as it did then.

Dow Jones Index Daily from 1937-1938 with Elliott Wave:


(click to enlarge)

Reference the prior blog post:  “Full Scale Wave Count on the S&P 500” which included this chart:

Looking at the charts side-by-side shows a chilling reflection of similar Wave structure progression that unfolded.

The structures contain the expected progression of 5-waves which properly subdivide into corresponding fractal waves as the big picture develops as the bear market progresses.

Keep in mind, there were no computers in 1937, no online brokerage accounts, no hedge funds, etc.  What’s stayed the same – arguably – is human psychology as investors’ fear and greed interact to create these patterns.  Also, Mr. Ralph Elliott almost certainly saw this 5-wave decline develop in the Dow during his time which perhaps was further confirmation of his “Wave Principle” he was developing at the time.

In the case of 1938, the circled 5 wave was the bottom (at 100) at that time before an ABC corrective rally launched.  If past is prologue, then we have yet to complete the final circled Wave 5 to complete the pattern, though we’re much closer now than we were.

What exactly happened after I cut-off the chart in 1938?  Stay tuned for an update!

Corey Rosenbloom
Afraid to Trade.com

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(A special thank you to reader Couns for bringing this similarity to my attention in the comment section)

23 Comments

23 Responses to “Amazing Similarities in Dow Jones 1937 and Today”

  1. Svet Says:

    Corey,

    what do you think about running Fibonacci retracements on the Dow given that GM and Citi (at least) will never recover to anything that even approaches their old glory and one could expand the list to include other companies as well…

  2. Corey Rosenbloom Says:

    Svet,

    I had a conversation about that at lunch today.

    I think the Dow Index is becoming obsolete and they are bending/breaking the rules of inclusion to account for the ‘changing times’ which will handicap the index perhaps permanently or until these companies are removed. Five companies trade under $10 per share in a price-weighted index. That’s unacceptable. Three others now trade above $10 but less than $12.50.

    To get back to where we were, these companies are going to have to undergo multiple instances of 100% gains. Some of them are going to have to increase 1,000% from here to get back to where they were last year. Alcoa must increase 766%. Bank of America must increase 12 times over or 1,200%. They need to be removed or the way the index is calculated needs to be changed. It is perhaps permanently damaged.

    I think we will have to turn our attention away from the Dow and towards the S&P 500 from now on.

  3. Svet Says:

    Agree 110%. The issue is that the Dow is still the popular index and I know a lot of finance professionals who couldn’t tell you even what zipcode the S&P resides in but know here the Dow is with great precision. It is also interesting that the two indices have moved within a relatively tight band in the past 10 years. This will have to decouple in the eventual recovery (whenever that arrives) unless the Dow is rebalanced before that.

  4. Anonymous Says:

    Corey,

    I forgot to leave my name – Dave.

    I’m the guy who wrote an exhausting paper as a Grad student on “Causality and Government Interest Rates”. The crux of the argument was that money supply and government deficits had very little influence on market interest rates. The paper was never published. The sample size was not huge but it was statistically robust and had a very low R2 when examining the causality of what variables determine the fluctuation in interest rates. History has justified my argument as those two variables have been discredited. I also wrote an addendum on market psychology when it was in its nascent days and insinuated that psychology was an important variable that needed to be considered when determining appropriate valuations.

    Like I said in the previous post, it is another tool and you seem to agree. I personally use FA (macro variables), QA (valuation metrics) and TA measures when entering positions. It is a fluid methodology and their is constant turnover in the model.

  5. John Brennan Says:

    Yes. Now all we need is a resource hungry Asian power to look outside its borders for sustenance and a lunatic fringe world leader hell-bent on the destruction of the majority of world Jewry to catapult us into an unprecedented world conflagration. HMMM.

  6. Anonymous Says:

    30 stocks were a proxy for the technological breadth of the US economy 80 years ago, but not now. Each time they adjust they kick out an economic sector. It should be 50 or 60. The world is just more complex.

  7. fal Says:

    i rather look at the sep’s and the periods 1966-1970-1974-(1982) and 1998-2002-NOW-?. draw a simple line through these lowes et voila! And for valuation taking $55.00 e 12 pe gives me a 660 target. If you consider capitulation we should easily exagerate this 660 target and move towards that 600 technical target.

  8. Corey Rosenbloom Says:

    I’m sorry everyone on the status on the server yesterday – increased traffic took the site offline sporadically yesterday.

  9. Corey Rosenbloom Says:

    Svet,

    Excellent point – so many eyes are focused on the Dow – for better or worse – that it perhaps more accurately captures social mood.

    On the way up, the divergence between the Dow and S&P 500 will most likely be striking.

  10. Corey Rosenbloom Says:

    Dave,

    That’s similar to the approach I’ve taken – that of nothing in isolation. The best stock to trade would be one that is fundamentally sound, setting up a buy signal using technical analysis, and then having quantitative research to help guide further precision. All while having a method to assess broader market trends and expectations.

  11. Corey Rosenbloom Says:

    John,

    Price patterns repeat – certainly hopefully not history.

  12. Corey Rosenbloom Says:

    Anon,

    I agree 100%. I’m surprised the 30 stocks in the Dow can roughly equivocate the S&P 500 so closely. I suspect changes will be made or else the divergence will be so striking that people will catch on to the Dow’s price-weighted weakness.

  13. Corey Rosenbloom Says:

    Fal,

    Seems the 650 to 660 target keeps coming up. That’s a 61.8% Fibonacci retracement from the 1982 lows, and varying fundamental models take us there as well. It also seems to be in line with an Elliott Wave equality (Wave 5 = Wave 1) target.

    Throw in the notion of panic at the bottom and we could certainly overshoot these targets as we put in a bottom.

  14. Anonymous Says:

    The fundamental backdrop is completely different, for one thing America was the preeminent power of the world during that time. The 20th century was the long story of the rise of the USA as a super power. The 21st century does not appear to be unfolding the same way. Yes, you can have wave patterns that, by hap instance look the same, just like clouds in the sky can take on shapes that look the same.

    But the long wave is different. For me the twin peeks of 2000 and 2007 represent the high water mark of America’s position in the world.

  15. howard Says:

    when everyone thinks one way the market almost always goes the opposite direction, the market will trade on the need for cash to make it's way back into the markets, now that the worst case scenario has been removed not fundamentals for the foreseable future

  16. howard Says:

    when everyone thinks one way the market almost always goes the opposite direction, the market will trade on the need for cash to make it's way back into the markets, now that the worst case scenario has been removed not fundamentals for the foreseable future

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