A reader asked me to revisit the 1929 Stock Market Crash through charts and the following chart of the Dow Jones reflects the period from 1922 to 1932 to show you the initial 1922 low and the final 1932 low and what happened in-between as seen on a weekly timeframe.
The stock market (as seen through the Dow Jones) started the 1920s roughly at index value 100 then came off those levels into the lows in 1921. From here, price mounted a remarkable 300% gain in the decade that took price to a final high of 386 before the Crash occurred and the onset of the “Great Depression.”
I’ve labeled a rudimentary Elliott Wave Count to show a powerful Wave 1 and extended Wave 3 without going into too much detail.
The actual price high formed on a Negative Momentum Divergence (not shown) as most 5th Waves have a tendency to do (our price high in 2007 formed on a Negative Divergence on many oscillators as well).
From this level, price began heading lower and then suddenly – literally – crashed in value in the middle of October 1929 to end the “Roaring 20’s”.
A Daily Chart shows the sell-signal up-close prior to the crash.
A Bull Flag formed which had its price-projection target near the highs at 380. A Flatline (equal swing) Momentum Divergence set-up at these new price highs, and then a quick negative divergence formed on the absolute price high.
Afterward, price retraced a larger than expected move to the downside, breaking both the 20 and 50 Exponential Moving Averages and forming two New Momentum Lows (new momentum lows often precede new price lows). Price also broke beneath the most recent swing low at 340 to create a new price low.
After the downswing into 320 and New Momentum Low formed, the 20 EMA crossed ‘bearishly’ underneath the 50 day EMA, which set-up a bearish structure. Price then rallied up into the confluence resistance area created by this cross – what I call the “Cradle” – and found resistance at this level (price could not close above the confluence level).
That was plenty of information to let you know that the structure had shifted to favor a more cautious approach, if not an aggressive short-selling entry (or at a minimum, long-liquidation). However, despite as bearish as the structure was developing, it in no way forecasted the magnitude of the Crash. After the Cradle Trade (and EMA Cross) formed, odds overwhelmingly favored a trend reversal… but the ensuing down-move – or crash – was perhaps more than anticipated.
Unfortunately, investors then did not have computers – or widespread access to charts – at that time.
Looking back at the past can help give us clues, or help us understand the present.
Afraid to Trade.com