Are we reliving the “Melt-Up” scenario of 1982?  Or is it more like 1975?  Both?  Neither?  Let’s take a look to see if we can draw parallels.

On Monday, I submitted an article to GreenFaucet.com entitled, “Are We Reliving the 1982 Scenario?”  I’m re-publishing most of the article here as well as a link to read a lengthier article by Clif Droke also at GreenFaucet.com entitled, “Why 2009 is Turning into be a Repeat of 1975.”

While I focused almost exclusively on the technicals (chart analysis - patterns in particular), Clif analyzes some of the macro-economic variables and similarities between then and now, and brings in Cycle analysis (for example, the Kress Cycle).

Head over to read his entire piece - here is most of my article which describes “The 1982 Scenario.”

Let’s highlight some eerie similarities in the charts of 2009 and the end of the 1982 Bear Market in what was called the “Melt-Up” action.

First, let’s look at the chart structure at the end of the Bear Market in 1980… though few realized this was the bottom at the time.

As price rebounded sharply off the August lows, price was ‘grossly overextended’ and then we had a rounded arc reversal pattern that accompanied negative volume and momentum divergences.  In the case of September 1982, we did see a much larger volume and momentum spike than we’re seeing now.  Price had broken down out of a rising trendline and beneath the 20 day exponential moving average (all charts are showing the 20 and 50 exponential average as well as the 200 day simple moving average).

Speaking in terms of visual charting or technical analysis, virtually any market forecast would have returned a bearish implication from the negative divergences combined with the trendline and moving average break, and the persistent downward trend in prices.

Let’s compare this action with the current S&P 500 (as of Monday, May 4):

Keep in mind price is higher now than it was when I captured this chart, making the case even more compelling… as you’ll see in an upcoming chart.

We see a negative volume divergence accompanying a negative momentum divergence (shown in the 3/10 Oscillator and in other momentum oscillators).  A similar geometric ‘arc’ has also formed, which hints at a gentle transfer between buyers and sellers (supply and demand) - also a reversal/retracement signal.

So, what happened back in 1982 after I froze the chart in the above image?

I wrote “unexpected breakout” because the odds (from a technical analysis and fundamental analysis standpoint… then just as now) favored a downward move or price retracement to ‘work off’ the overbought conditions.  Plus, price had broken a rising trendline and the rising 20 EMA, triggering at least a short-term sell signal.

If I extended the chart further to the right, you would see price continue its steady trek higher, rising persistently into August 1983 before any meaningful pullback occurred.  We often refer to this period as the “Market Melt-Up” (as opposed to a melt-down) or as the “Creeping/Oozing Trend Up” that continued to defy the bears (sellers).

Let’s see the “1982 Scenario” in full context from down-move to the expected “reversal” point that failed and the subsequent ‘melt-up’ that occurred afterwards.

And for comparison, let’s see the 1975 price action (in the Dow Jones instead of the S&P 500) which shows an eerily similar pattern.

So which one is it?  1975 or 1982?  Or both?  Might this be a common chart structure or development that forms at the end of a bear market?

If either scnario happens to be correct, we can expect higher prices yet to come… no matter how strange that seems or how odd it might feel, fundamentally, technically, or quantatatively.

Corey Rosenbloom, CMT
Afraid to Trade.com

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