Looking Back on the 1929 Stock Market Crash

Mar 5, 2009: 12:39 PM CST

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.


(Click for Larger Image)

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.

Corey Rosenbloom
Afraid to Trade.com

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17 Comments

17 Responses to “Looking Back on the 1929 Stock Market Crash”

  1. DaveB Says:

    It’s amazing how those bear flags all respected the 20ema – I guess some things in markets never change. Even though there were no computers I’m sure the big players employed people to calculate that and other indicators for them every day. What a disadvantage it must have been to individual traders back then, to not have access to even the most basic TA data like the professionals surely did.

    By the way, what is the difference between a bear/bull flag and a AB=CD measured move? Is it the steepness of the “flagpole”?

    Just a nagging question I’ve been meaning to ask. In any case they’re two of my favorite patterns to watch for, even if I’m not sure which is which sometimes.

  2. Andrew Stanton Says:

    Nice head and shoulders on that daily chart although the sell signal wouldn’t have come in until about 310.

  3. Chris Says:

    One thing which is scary on these charts is no Major Wave B bounce back of an ABC pattern move.

  4. Corey Rosenbloom Says:

    Dave,

    Good point! Maybe it’s a psychological thing where price just ‘feels’ retraced enough. Maybe markets capture human psychology more than we think. It’s a mystery.

    I’m sure there were low-paid workers who had to calculate rudimentary TA components by hand but I’m thinking most charts at that time were Point and Figure. I don’t think there were candles then (almost certain) and bars I don’t think were that widely used. Maybe someone can enlighten me.

    Oh, a Bear Flag MUST occur in the context of a downtrend (AB=CD does not have to) and a Bear Flag must have a steep impulse or pole (AB=CD does not).

    Both have the same target but essentially a “Measured Move” is an “Equal Swing” and is less-stringent than a Bear Flag which has certain rules it must meet.

  5. Corey Rosenbloom Says:

    Andrew,

    Good point! I missed that because it was angled down. I’m used to a flat neckline.

    But even taking that late chart signal would have got you out or short prior to the plunge decline.

  6. Corey Rosenbloom Says:

    Chris,

    Actually, one could argue that the decline from 380 to 200 was a 5-wave down affair like we’re having now and like that which appeared in 1939. Well, that was the “A” Wave at least (as seen on the Daily chart).

    The “B” on the weekly chart retraced 50% so that was a pretty strong retracement. Wave C Down was killer though.

  7. Anonymous Says:

    Thanks Corey!
    FWIW, Prechter et. al. have us in wave 3 (down) of 5 of 1 of c (down).
    (I don’t have time right now to check that completely).
    In any case, this bear is big, and we all need to keep that in mind even as we see rallies and/or corrections.

  8. Corey Rosenbloom Says:

    I’m with Prechter’s count in as much as we’re in 3 of (5). Not willing to go on a limb and say we’re in 1 of C though – I just can’t fathom the bearishness that would mean. If it happens, it happens, and I’ll take it one swing at a time, but I’m not willing to believe we’re in 1 of a hideous C that could take the Dow Jones to 400. Yes, Dow Jones, not S&P.

  9. Anonymous Says:

    Right? It seems unfathomable. I also agree with the strategy of taking a shorter term stance. However, the idea does merit consideration. Not many ppl. in early ‘07 thought we would be where we are today (much less 2000). Trading view vs. macro view is always an interesting exercise.
    Thanks for all the effort.

  10. Aly Says:

    This was rather interesting. Although you should lighten this up. Blurting all this information out, doesnt really draw the attention to anyone(my opinion). I do like and enjoy learning about historical events but maybe you should consider making the events more fun. I'm not saying to change the events that occued during that period of time, but atleast talk about how it affected many of the family's, not just”It affected families”, say the specific family just give one example of A family that was affected by this. i hope you consider this, with that said, this was a very interesting thing for me to read.

  11. sfrigo Says:

    I need to know if the 50 Day ema crossed back up over the 200 day ema following the 1929 crash.
    The 50 will cross above the 200 day EMA between the 11th or 13th next week barring a marjor pull back to 950ish. If it also crossed on the fake post 29 rally I will keep my bear hat on.

    Thanks

  12. sfrigo Says:

    I need to know if the 50 Day ema crossed back up over the 200 day ema following the 1929 crash.
    The 50 will cross above the 200 day EMA between the 11th or 13th next week barring a marjor pull back to 950ish. If it also crossed on the fake post 29 rally I will keep my bear hat on.

    Thanks

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