Black Monday – Ancient History or Possible Future?

Oct 29, 2009: 4:32 PM CST

I wanted to share a portion of an article written by Robert Prechter of Elliott Wave.com in his recent “EW Theorist” newsletter where he discusses the possible historical link between the 1929 market crash and today’s eerily similar looking rally.

For the full article, check out the page by analyst Nico Issac, “Black Monday:  Ancient  History or Imminent Future?

“Case in point: The 2008 “Black Monday” anniversary. At the time, the U.S. stock market was locked in a ferocious downtrend that included regular, triple-digit daily declines of 400 points and more. Needless to say, when the final two Mondays of October arrived, the least superstitious investors surrounded their portfolios with more good-luck talismans than a Bingo player.

See October 19, 2008 AP headline below:

“Black Monday: Stocks Sink As Gloom Seizes Wall Street. Prolonged Economic Turmoil” is seen.

Along with a similar extreme in bullish sentiment, the performance of stocks between now and the 1929 situation is cut from the same cloth. After an initial plunge from August 1929 through late October 1929, the US stock market enjoyed a powerful rally well into the following year.

NOW: After a steep freefall from its October 2007 peak, the US stock market is once again enjoying the fruits of a powerful rally back to new highs for the year.
Also, on closer examination, the October 19 Elliott Wave Theorist (EWT, for short) uncovers an even deeper parallel between the 2009 rally and the 1929-30 one. Here, EWT presents the following snapshot of the Dow during the Depression-era advance:


As Bob Prechter points out — in 1930, stocks rallied to the level of the preceding year’s gap. Bob then reveals that the same level has been reached now.
So, we all know how the 1930 rally ended. The question is whether the 2009 advance will experience the same fate. As Bob explains in the Theorist, the only way to know for certain is to “look at the reality of the situation.”

For more insights from Robert Prechter, download the 75-page eBook Independent Investor eBook. It’s a compilation of some of the New York Times bestselling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.

I am able to offer this article to you with permission as an affiliate member of Elliott Wave International.

As a reference, I have posted similar charts (and posts) of the 1929 period which show a similar structure to what is shown in the chart above.  See the following for additional analysis:

A Look at the 1929 and 1937 Crashes and Recoveries

Looking Back on the 1929 Stock Market Crash

Here’s a weekly chart of the 1929 crash from my “Crash and Recovery” post:

It’s helpful to see these charts from as many perspectives as possible.

For 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 “Melt-Up” which appears indeed that history did repeat itself to the upside in these cases.

Corey Rosenbloom, CMT

20 Comments

20 Responses to “Black Monday – Ancient History or Possible Future?”

  1. TickerStreet Says:

    Corey, Let's be honest. Precter has been saying the same for 3 months now. Is he right? Many people say he has been the same for many years. Do you have an answer?

    I really hope you answer the question and not leave it unanswered.

  2. harryvanbeuningen Says:

    Prechter is a bright guy, but has been wrong more often than he has been right. I was a subscriber of his in the 1980's. This is not to say that he is of base with this projection, but I would not put too much faith in his prediction.

  3. Dan de Man Says:

    Thank you for the article Corey. Everyone's entitled to their own opinions and a trader's mind should not be clouded by what they hear. If a trader has a valid system they should just follow their TA signals.

    For the good of the world I hope this scenario does not play out. But if it does happen, I sure wouldn't mind going short day trading a 400 point day.

  4. Corey Rosenbloom, CMT Says:

    I'm not as bearish as Mr. Prechter, and I don't think we're going into a Wave 3 down – I'm more inclined to think we're possibly heading into the final Wave 5 down to complete the ABC pattern as I've been saying in my updates:

    http://blog.afraidtotrade.com/sp500-elliott-wav

    The alternate interpretation is that we bottomed (Wave 5 of C) in March 2009 and that this is the beginning of a new bull market… but with all the divergences in momentum and volume, this feels more like a corrective “bear flag” style rally.

    That leads me to believe that, yes, we do have greater odds of downside action ahead… but not to the extent of a move far beneath 660 or 600.

    I do remember, and I updated readers, when Mr. Prechter went on CNBC and started releasing articles in late March/early April to “Cover your Shorts” for a large rally that he was spot-on in calling.

    He's now making the rounds again saying the big rally has ended… which I tend to agree, but NOT to the extent of the decline he's forecasting.

  5. Corey Rosenbloom, CMT Says:

    I'm with you – again, I think Mr. Prechter is brilliant and I have so much respect for him, but he is one voice among many and we all are entitled to our Elliott counts and market forecasts no matter how much experience we have.

  6. Corey Rosenbloom, CMT Says:

    Haha – as a trader, we crave volatility, so I know a few people who are hoping Mr. Prechter is right so they can take advantage of the volatility both intraday and with swing/position trades.

    What interests me about his report – or more so the chart he shows above – is that which many people including myself have said – the 1929 crash looks very similar to the 2008 crash along with the sharp rally that preceded it.

    I did an update post here that showed roughly the exact same chart:

    http://blog.afraidtotrade.com/a-look-at-the-192

    http://blog.afraidtotrade.com/looking-back-on-t

    I'll add these links to the post above for reference.

  7. TickerStreet Says:

    Thanks Corey.

  8. terlyn Says:

    I don't care how low it goes, as long as I'm on the right side of the trade. I DO care about the economic consequences he discusses in Conquer the Crash, and his urge to readers to put savings into treasury bills, designated safe banks in other countries, buying real gold, and keeping a lot of cash handy, among other suggestions to prepare for banks collapsing (as they already are), electronic trading systems freezing (as my broker's did yesterday), and other extreme measures. If I had not lived through last Sept-Oct, I would not have such dire forecasts.

  9. Dan de Man Says:

    Thanks for the links Corey. I would have to agree the charts look ominously similar but I am guessing that it will play out as you described to TickerStreet. I don't wish ill upon the world, I just want my fair share.

    I just think this market needs some good ol' panic selling so the long term money can come in and save the day on the way down. How about we just go to the bottom of the weekly bband to 881 and bounce back up from there, just so the bears get a little piece of the action.

    http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=1&

  10. TickerStreet Says:

    Corey, Let's be honest. Precter has been saying the same for 3 months now. Is he right? Many people say he has been the same for many years. Do you have an answer?

    I really hope you answer the question and not leave it unanswered.

  11. harryvanbeuningen Says:

    Prechter is a bright guy, but has been wrong more often than he has been right. I was a subscriber of his in the 1980's. This is not to say that he is of base with this projection, but I would not put too much faith in his prediction.

  12. Dan de Man Says:

    Thank you for the article Corey. Everyone's entitled to their own opinions and a trader's mind should not be clouded by what they hear. If a trader has a valid system they should just follow their TA signals.

    For the good of the world I hope this scenario does not play out. But if it does happen, I sure wouldn't mind going short day trading a 400 point day.

  13. Corey Rosenbloom, CMT Says:

    I'm certainly not as bearish as Mr. Prechter, and I don't think we're going into a Wave 3 down – I'm more inclined to think we're possibly heading into the final Wave 5 down to complete the ABC pattern as I've been saying in my updates:

    http://blog.afraidtotrade.com/sp500-elliott-wav

    The alternate interpretation is that we bottomed (Wave 5 of C) in March 2009 and that this is the beginning of a new bull market… but with all the divergences in momentum and volume, this feels more like a corrective “bear flag” style rally.

    I admit that it's spooky to me that the current market looks so similar to that of 1929.

    That leads me to believe that, yes, we do have greater odds of downside action ahead… but not to the extent of a move far beneath 660 or 600.

    I do remember, and I updated readers, when Mr. Prechter went on CNBC and started releasing articles in late March/early April to “Cover your Shorts” for a large rally that he was spot-on in calling.

    He's now making the rounds again saying the big rally has ended… which I tend to agree, but NOT to the extent of the decline he's forecasting.

  14. Corey Rosenbloom, CMT Says:

    I'm with you – again, I think Mr. Prechter is brilliant and I have so much respect for him, but he is one voice among many and we all are entitled to our Elliott counts and market forecasts no matter how much experience we have.

  15. Corey Rosenbloom, CMT Says:

    Haha – as a trader, we crave volatility, so I know a few people who are hoping Mr. Prechter is right so they can take advantage of the volatility both intraday and with swing/position trades.

    What interests me about his report – or more so the chart he shows above – is that which many people including myself have said – the 1929 crash looks very similar to the 2008 crash along with the sharp rally that preceded it.

    I did an update post here that showed roughly the exact same chart:

    http://blog.afraidtotrade.com/a-look-at-the-192

    http://blog.afraidtotrade.com/looking-back-on-t

    I'll add these links to the post above for reference.

  16. TickerStreet Says:

    Thanks Corey.

  17. terlyn Says:

    I don't care how low it goes, as long as I'm on the right side of the trade. I DO care about the economic consequences he discusses in Conquer the Crash, and his urge to readers to put savings into treasury bills, designated safe banks in other countries, buying real gold, and keeping a lot of cash handy, among other suggestions to prepare for banks collapsing (as they already are), electronic trading systems freezing (as my broker's did yesterday), and other extreme measures. If I had not lived through last Sept-Oct, I would not have paid attention to such dire forecasts.

  18. Dan de Man Says:

    Thanks for the links Corey. I would have to agree the charts look ominously similar but I am guessing that it will play out as you described to TickerStreet. I don't wish ill upon the world, I just want my fair share.

    I just think this market needs some good ol' panic selling so the long term money can come in and save the day on the way down. How about we just go to the bottom of the weekly bband to 881 and bounce back up from there, just so the bears get a little piece of the action.

    http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=1&

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