Are We Reliving 1982 or 1975?

May 6, 2009: 2:23 PM CST

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

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

13 Comments

13 Responses to “Are We Reliving 1982 or 1975?”

  1. Don Da Mon Says:

    How about comparisons with 2002 ish? Looking at the charts they seem similar also.

  2. Mike Says:

    What . . . No more Elliott Wave analysis and the Leading or Ending Diagonal scenario???

  3. Corey Rosenbloom, CMT Says:

    Don,

    Good point, only then we had a triple bottom pattern (could be the case now in fact). The implication is that after a bear market ends, most people are caught off guard and price runs rapidly without them until they've missed a large part of the move.

  4. Corey Rosenbloom, CMT Says:

    Mike,

    The Elliott Count suggests one of two possibilities:

    A) We're in a W4 rally up to the 1,000/1,1000 level, a possibility I've highlighted before
    B) We've completely finished the 5-wave down of C and are now in Wave 1 up of grand supercycle 5. 2000-2009 was thus an ABC Wave 4.

    What threw me and other Elliotticians is that we didn't get a final push to finish out either the fractal 5 or the fractal 3rd – though both scenarios called for a large rally (being W4 or W1). That's why I wasn't concerned with exactly which count was playing out – they said the same thing until a certain point which was months into the future at the time of my analysis. We're still on course.

  5. Mike Says:

    Thanks Corey!

  6. Joe_in_Indiana Says:

    Corey,

    Interesting and informative post. Thank you.

    What about fan lines off the 3/6 low. We have been bouncing off that third fan line. What are the downside probabilities with breaking that third fan line?

    Thanks in advance!

  7. Gerald Clifton Says:

    Charts are abstract, by definition. Pattern analysis is a coin flip, simply because about half of all identifiable patterns fail to achieve their measured moves. And, if there are no measured moves, there are no patterns. The first thing I noticed about this chart is that there are no momentum indicators — just pattern analysis. Where was the MACD (however you define the time periods)? Where was the RSI? And (of course) most importantly, what was the sentiment??? Corey doesn't give us this important element in the overall formula, although he hints at it.

    “Common chart structures” mean nothing if everyone is leaning the wrong way. The fact is, as I have seen over and over again during the past 30+ years of trading, most people PRETEND to be technicians (pattern watchers, in the majority) while they are at heart simply reading the current news narratives and believing them.

    You cannot trade without sentiment indicators, and sentiment indicators are very tricky. They have their own cycles, and, by definition, bottoms AND mid-move consolidations are marked by negative sentiment.

    If you want to take a swing at THIS current market conundrum, you had better have a handle on market sentiment. Who is leaning the wrong way?

  8. Corey Rosenbloom, CMT Says:

    Gerald,

    I want to make sure you're not missing the point in chart patterns. If half of them meet their targets (an accepted figure), what you're missing is that when a chart pattern hits its target, it will often return on the magnitude of 2 or 3 or more times the risk (stop-loss) when the pattern fails. Patterns have edge not through their accuracy but through the monetary edge, as in making a multiple of the risk (both of which are clearly defined). You can ideally increase the accuracy edge through pattern filtering – using higher timeframes, other forms of analysis, indicators, sentiment (especially), etc so you can tip your accuracy above 50%.

    Regarding sentiment, yes, you need to incorporate sentiment into trading decisions. Keep in mind I'm limited space and time-wise with what I write in these posts – and that I'm not giving away all my secrets and research for free. Often I'm trying to zero-in on a specific point as a teaching exercise, or calling attention to a specific phenomenon.

  9. nickmarshall Says:

    The current S&P chart bears only a superficial resemblance to the 1982 chart. In 6 weeks the 1982 S&P rose about 20% in a clear 5 wave pattern which can hardly describe the March to early May 09 chart which is overlapping but involved a 36% rise to the point at which you cut the screen shot off. The market had been in a big sideways move since 1966 which most analysts count as the top of the wave 3 – which is a significantly different context to a correction after the biggest fall in nearly 80 years.
    The fact is that fractals so often look the same. I often forget whether I am looking at a 5 minute chart or a 60 minute chart because they can be so similar. The current sentiment is typical of a wave 2 correction – people have very quickly forgotten the pain of last year and the first 2 months of this one. The talk is all bullish and suggests to me that we are much closer to a top than in danger of missing out on a new bull market. This is why Robert Prechter is still the master of Elliott Wave theory. He studies human behaviour as reflected by stockmarket indexes. Elliott Waves are not some magic theory driven by an abstract mathematics. They are driven by human greed and fear. Essentially they are waves of growth, the rise and fall in the tides of human affairs. Trying to make a wave count without trying to tie it in with what is actually happening – the socionomics as opposed to the economics – is like trying to tie your shoelaces one handed.

  10. nickmarshall Says:

    The current S&P chart bears only a superficial resemblance to the 1982 chart. In 6 weeks the 1982 S&P rose about 20% in a clear 5 wave pattern which can hardly describe the March to early May 09 chart which is overlapping but involved a 36% rise to the point at which you cut the screen shot off. The market had been in a big sideways move since 1966 which most analysts count as the top of the wave 3 – which is a significantly different context to a correction after the biggest fall in nearly 80 years.
    The fact is that fractals so often look the same. I often forget whether I am looking at a 5 minute chart or a 60 minute chart because they can be so similar. The current sentiment is typical of a wave 2 correction – people have very quickly forgotten the pain of last year and the first 2 months of this one. The talk is all bullish and suggests to me that we are much closer to a top than in danger of missing out on a new bull market. This is why Robert Prechter is still the master of Elliott Wave theory. He studies human behaviour as reflected by stockmarket indexes. Elliott Waves are not some magic theory driven by an abstract mathematics. They are driven by human greed and fear. Essentially they are waves of growth, the rise and fall in the tides of human affairs. Trying to make a wave count without trying to tie it in with what is actually happening – the socionomics as opposed to the economics – is like trying to tie your shoelaces one handed.

  11. Black Monday - Ancient History or Possible Future? | Afraid to Trade.com Blog Says:

    […] another (positive) look, compare to my post “Are We Reliving 1982 or 1975?“  where you can see how the analysis played out.  This referred to the market […]

  12. Black Monday – Ancient History or Possible Future? | Penny Stock Trading System Blog Says:

    […] another (positive) look, compare to my post “Are We Reliving 1982 or 1975?“  where you can see how the analysis played out.  This referred to the market […]

  13. bernard12 Says:

    Technically you can argue which market we are mimicing but fundamentally we exist in a global market now and this debt crisis is new and expanding. Can you comment on how small caps have done during these different market crashes? What are your thoughts on small cap etfs?