Confluence Support Zone for the 1987 Low

Jan 2, 2009: 12:08 PM CST

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.

Corey Rosenbloom
Afraid to


A Weekly Chart Look at the 1987 Market Crash

Jan 1, 2009: 9:18 PM CST

As a follow-up to the previous post on the 1987 Market Crash (on the daily chart), the following post creates an overview of the crash starting with 1984 and moving up to the crash, while looking at the perspective with an Elliott Wave impulse count.  Let’s see it.

S&P 500 Weekly Chart with Elliott Waves:

The market actually bottomed in 1982, but I’m showing a fractal of the larger move (remember Elliott Wave is comprised of many structural fractal waves that form the larger pattern).

We have a 5-wave internally valid structure that comprises the First Wave, which lasts from 1984 until mid 1985 that completed with a pullback to the 50 week EMA before finding support (notice the “ABC” corrective pattern that made up the 2nd Wave).

Price then rose steaily off this support zone to make new highs going into 1986 before forming another full Elliott Wave impulse that comprised the 3rd Wave that also lasted about one and a half years that terminated with an ABC “flat” correction at the 250 ’round number’ index support.

Price once again found support at the rising 50 week EMA before rallying sharply yet again into the final Five-Wave fractal impulse that terminated on a flat-line momentum divergence (not shown) into new price highs at the 330 level.  Notice again we have a complete five-wave internally valid impulse that comprised the 5th Wave.

After the fractal 5th wave completed the larger 5th wave (circled) Elliott pattern, price then retraced back to the rising 50 week EMA, found support (the “B” corrective wave)), then plunged without ceasing as price embarked on the destructive “C” Wave down.

From a technical perspective, stops should have been placed beneath the rising 20 EMA which would have been taken out, or also (more aggressively) beneath the rising 50 week EMA which also would have been taken out just before the large downside gap.  Trying to trade without stops would have resulted in the disastrous consequences that befell so many traders and investors at this time.  Again, direction is easier to forecast than magnitude.

Here’s where it gets most interesting to me.

Once we were in a free-fall, where was a logical target and/or support zone ahead for price?  Keep in mind that when the market fell as quickly as it did, people were in a panic to find supposed support, particularly because the decline developed out of a seemingly healthy technical (trend) position.

Price hit the rising 200 week SMA to the penny and nipped just beneath the 61.8% Fibonacci retracement (located at 220.23) of the move from the July 1984 lows to the August 1987 price highs.  A second ‘test’ of this level actually did hold precisely at the 61.8% Fibonacci level.

I would suggest that price targets are best set through *confluence* – meaning, the more methods that align near a certain price, the higher the probability that price will contain (support or resist) price.  Of course there were more confluences at this level, but I wanted to highlight the 200 week SMA and the 61.8% Fibonacci retracement as they are familiar reference points to most traders (note – the 50 Month EMA rested at 226 at this time, adding more weight to the ‘eerie’ confluence at the 220 level).

Price did find a bottom here and we’ve never seen 220 on the S&P 500 Index since this time.

Study this time period carefully for insights into price behavior so that you can be better prepared to react to similar developments in today’s markets when they arise.

Corey Rosenbloom
Afraid to


A Technical Look at the 1987 Stock Market Crash

Jan 1, 2009: 3:19 PM CST

I was scanning some different periods for interesting chart patterns and wanted to share some insights on the structure of the 1987 stock market ‘crash’ in the S&P 500 Index.  Let’s look at the chart of 1987 and then see the few years preceding this move with an Elliott Wave count overlaid on price.

1987 Daily Chart:

Without going into intricate detail, there are a few points I wanted to highlight.

First, notice how price continually respected the rising 20 day EMA both on the upside and downside.  Moving averages, particularly in trending environments, can provide opportunities to enter on retracements against the prevailing trend with a relatively tight stop-loss parameter.  Though it doesn’t always “work,” the structure can be used to supplement other entry and exit strategies.

The moving average orientation throughout most of 1987 was in the “Most Bullish Orientation” possible as price continued to ‘bounce’ off the 20 and 50 EMAs.

However, this structure changed in September.  Price formed a slight negative momentum divergence going into the 1987 price high in late August.  Price then retraced, breaking EMA support just as it had in April & May, which only serves as a warning rather than an official “trend change” signal.

Price formed a lower high just shy of 330 in early October was was a serious warning sign as price then re-broke beneath the confluence support of the 20 and 50 EMAs – another serious warning sign.  The key area to watch was 310, which would have put in a new swing low and officially turned the trend to the downside (having now made a lower high and a lower low).

We broke 310 in mid-October AND the 20 and 50 period EMAs “crossed bearishly” which officially put the ‘nail in the coffin’ of the prevailing uptrend on the daily chart.  Price then retraced to test the confluence crossover zone – I’m calling it a “Cradle Trade” though I’d love a better name for this structure – just before collapsing two days prior to the massive ’shocking’ sell-off that wiped out so many accounts at this time.

Oh, a note – once price fails at the “Cradle Resistance” or “Confluence Resistance” area after having broken beneath the 20 and 50 EMAs, the next automatic target is the rising 200 day SMA which was achieved… and then shattered two days later.

What happened next?  The collapse.

Was it forecast by technical analysis?  No, but the odds had officially shifted to the downside, as price had officially reversed its trend from up to down, having formed a lower high and a lower low; broke beneath the 20 and 50 day EMAs; then failed to break above confluence resistance at the “Cradle Trade” zone (Confluence Resistance where the 20 and 50 EMAs cross).

At a minimum, technical analysis warned of greater downside odds than upside odds, though again it’s easier to anticipate the possible direction of a move rather than the magnitude of the move.

As it turned out, price collapsed to the rising 200 week moving average which also happened to be a confluence Fibonacci target, because index value 220 represented the 61.8% retracement of a significnant swing low in 1984.

In the next post, I’ll examine the weekly chart structure and overlay an Elliott Wave Count to help put the 1987 ‘crash’ into a bit more perspective.

Corey Rosenbloom
Afraid to

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2008 Final Index Performance Numbers

Dec 31, 2008: 8:48 PM CST

Courtesy, here are the year-to-date performances of a broad assortment of major market Indexes, including the US Equities, CRB Commodity Index, and Dollar Index.

You can view the chart yourself at or use your own program to display other index and stock returns for 2008.  Just be sensitive to seeing lots of red and don’t be disappointed by lots of minus signs.

Let 2008 be a reminder that bad things can happen to investors and traders, and that it’s not always safe to “Buy and Hold” or that “Diversification Always Works.”

Yes, the market will rebound from these levels – eventually – but it may take years to get back to the equity peaks of 2007.  In addition, those who diversified in 2008 – hoping to mitigate risk – experienced the phenomenon that in a down-market, almost all correlations go to 1.0.

Real Estate? Down depending on location location location.
US Equities? Down 40%
Foreign Equities? Most Down over 40%
Oil? Down 60% for the year ($WTIC)
Gold? Up about 2% for the year ($GOLD)
TLT Bond FundUp 30% (I had to find something up)

In fact bond/note prices did well as some yields fell to record lows this year.

Take this weekend if not sooner to reflect on the lessons of 2008 and how you can identify problems, create solutions, and set goals to achieve and a plan of action to achieve them in 2009.

Corey Rosenbloom
Afraid to

Hat-tip to Brian Shannon of AlphaTrends for also posting end-of-year numbers on key ETFs.


Nice Trend Day Up – Good Way to End 2008

Dec 31, 2008: 8:19 PM CST

2008 is finally behind us and the year ended on a positive note – a nice, solid trend day to the upside.  Let’s look at the DIA intraday structure to reflect on this pleasant picture.

DIA 5-min chart Dec 31, 2008:

This is what a trend day should be – except for the close, that is.

We had a nice run from the start the resulted in a “Three Push” reversal pattern that resulted only in a retracement to the rising 50 period EMA.  Until that point, any pullback was a safe buy-zone, while the 50 remained the “last line of defense” for the bulls and also served as a support buy-zone.

Price bounced sharply off the second test of the rising 50 EMA to tap new intraday highs before forming more choppy retracements back to the rising 20 EMA into additional new price highs around 3:30.

The only thing that tarnished today’s trend day move was the last 30 minutes of trading, where price formed a bearish shooting star at the upper Bollinger Band on a negative momentum divergence which preceded price reversing sharply end the day just beneath the 50 EMA.  Day traders should exit at or just prior to the close each day.

A few readers have commented on the appearance of negative momentum divergences on Trend Days and my resonse is generally to throw all forms of indicators (except moving averages) off the charts on expected trend days because they will (virtually) all give false signals.  Oscillators (Stochastic and RSI) will remain overbought all day and other indicators will be skewed as well, flashing sell signals as price continues to eek its way higher.

Look at the 3/10 Oscillator for an example.  As price continued its journey making newer highs all day, the momentum oscillator disconfirmed all highs as the day progressed.  There’s no point in trying to interpret it – sometimes it’s just best to turn off the indicators and focus your analysis strictly on one question?

“Is Price above or testing the 20 (and/or 50) period EMA?”

If we’re above it and the averages are in the most bullish orientation, then buy all pullbacks.

If we slip below it and close beneath it, take your stops and realize the trend day has ended.

Don’t try to get fancy – keep it as simple as possible.  Traders can stand to make the bulk of their monthly profits on trend days.

Continue to find additional insights in today’s price data and, even though today marks the end of 2008, the trading still continues each day.

Have a great time tonight!

Corey Rosenbloom
Afraid to

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