A reader asked me to elaborate on the various confluence price points that helped set in the 1987 “crash” low and here is a representation of some of those points.
S&P 500 from 1980 to 1987 – compressed with Gann and Fibonacci:
Let me explain what I’ve done with this chart. I begin the chart at 1980 and then insert a Gann Fan off the significant support lows of 1980 and then allow the program to project the Fan Angles into infinity. I also drew a Fibonacci grid from the 1987 price highs near 336 and then ran the grid back down to the 1980 support lows near 97. So as not to have the chart be too large, I have compressed or “chopped off” the middle portion of the chart which is year 1981 to 1986 so we can focus mainly on the confluence support levels in 1987.
Gann Fan (Angles)
First let’s start with the Gann Fan. I wish I were able to show the full chart becuase the Gann Fan angles quite remarkably contain price swings both as support and resistance throughout this time period – it’s interesting at least. Focus mainly on the 1×3 line which is the line that ends at the 230 Index Level. Price tagged this upward sloping line to form the absolute bottom of the crash – fascinating in and of itself. I’m by no means a Gann expert, so I’ll just leave it at that.
What I can discuss more in-depth is the Fibonacci confluence price zones which set-up near the 220 level. The main (or most important) Fibonacci retracement levels arise from the 1980 to 1987 top to bottom swing which places the 50% large-scale Fibonacci retracement at 216.63 – again, a level which acted as major support for the 1987 crash.
If you draw a Fibonacci grid from the 1982 price lows at 103 to the 1987 highs, then you get 220 as the 50% Fibonacci retracement (that’s not as significant because the 1980 and 1982 lows were not far apart).
Drawing a Fibonacci grid off the 1984 price lows off support at index value 148 to the 1987 price high results in the 61.8% Fibonacci retracement being located at 220.28 (not drawn on the chart).
Finally, in terms of Fibonacci Extensions (or Projections), if one constructed a Fibonacci Extension line from the 336 peak high to the next swing low of 308 (which could be considered the “A” Corrective Wave), we are given various Fibonacci downside projections, the most significant of which (and most unlikely target at the time before the crash) was the 423.6% Fibonacci Projection, which just so happened to land at 220.66.
Moving Average Support:
I’ve shown in the previous posts that the 200 week Simple Moving Average also contained price at the 220 Index Level.
On the monthly chart, price found support additionally via the rising 50 month Exponential Moving Average which was actually at 225 at the time of the crash – price pierced this line though did not close beneath it at any time.
I’m not writing this post to discuss the “Magic of the Market.” Rather, I’m trying to open your eyes to searching for confluence price areas created through non-correlated methods of finding either price projections or support and resistance.
Though any one of these methods – and there are many more I could have discussed – could have helped create support (and buying pressure), I want to emphasize that you’ll often get better results in your trading if you can identify “Confluence” Price Points rather than singular price points.
Nothing will guarantee that price will find support at a certain level, but you can increase confidence in your trading when you find non-correlated methods (in this case, Gann, Fibonacci, and indicators via moving averages on different timeframes) pointing to a similar price zone as likely to contain (or resist) price.
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