Bear (stock market term)

Was that the Stock Market Crash?

Stock Market News

“Never allow a good crisis go to waste. It’s an opportunity to do the things you once thought were impossible.” – Rahm Emanuel[1]


On Monday the Dow Jones hit 18,2226 at one point, as of Friday’s close it ended at 21,636. Was that the low point of the stock market crash of 2020, or is there more pain ahead?

We will not know the answer until we get to 2021. Until then please consider several charts below, courtesy of Stockcharts,  beginning with the chart of the 2007 to 2009 stock market crash using symbol $INDU to represent the Dow Jones Industrial Average INDEX:

Dow Chart 2007 to 2009

The crash began around October 2007 when the Dow hit a high of over 14,000. Stocks continued to decline until March 2009 when the Dow was in the 6,000 range. If you don’t understand technical analysis now, it’s okay, you will soon:

  • The RSI (indicator above the chart) broke below 50 in November 2007 and didn’t break back up 50 until May 2009.
  • Looking at the price on the chart, notice how the 50-week moving average (blue line) and the Chandelier exit (green line) broke near the end of 2007 and the 200-week moving average (red line) was broken in the middle of 2008. The price didn’t break above the 50-week again until the middle of 2009, while it broke above the chandelier exit as early as March 2009! (This would have been a great time to buy!)
  • The MACD (indicator below the chart) shows January 2008 as a great sell signal when it went negative, and the confirmation of breakout in July 2009 when it went back into positive territory. There are various other signals in the chart you may be able to spot, but the positive/negative values in the chart are one of the best.
  • The Full STO (indicator below the MACD) is also a great momentum indicator, similar to the RSI, notice the momentum of the stock when it breaks below the 50 and compare it to when it breaks above the 50. In April 2009 it broke above the 50 after a prolonged time spent around the 20 range. If you bought then, it also would have been a great time to buy.

Also note that many famous crashes occurred in October, some even call it the “October effect.”[2]

The 2007 to 2009 crash took a very long time in hindsight, while in the moment it seemed like an eternity. As I’ve noted before in articles and on twitter, money supply is everything. September 2008 to December 2008, the Fed’s balance sheet increased from $1 Trillion to over $2 Trillion; the result of this central induced inflation (i.e. increase in the supply of money and credit) is the primary reason why the prices of stocks, bonds and real estate increased. You can see the Fed’s balance sheet on the BIG CHART on the website as well as the Fed’s fund rate at the time.

Understanding technical analysis and the role that inflation has on increasing the prices of stocks is important; however, there are other complexities to consider as well. The world has changed a lot in the last decade. We can only assume that advancements in technology, trading algorithms, high frequency and computer related programs have substantially increased since then. We may also assume that market inventions such as the actions of the Plunge Protection Team and other state interventions have increased since a decade prior. Coupled with the increase in money supply and all other central bank interventions as well, it’s possible the next stock market crash will not be as prolonged as the 2007 crash.

Another issue which has changed since then: the acceptance of government intervention in the market. If you were cognisant of events during 2007 to 2009, you probably recall the amount of debate and time it took to bailout various corporations and the Fed’s intervention. Consider how quickly it seems that this $2 Trillion government stimulus seemed to be not only accepted, but expected by practically everyone. Or consider the normalcy of statements by central bankers pledging as much money as necessary to support the markets, or central bank interference in the corporate bond market as well. A long list of interventions could be made. The point is, it seems society is completely accepting of all and every interference in the market.

If this year is any indication of things to come, then this decade may become the “free money for all” era.

What this may mean for stocks and this latest stock crash, is that the length of any crash might not be as prolonged as in the past. If the great recession took almost two years, it is possible that the crash of 2020 took only two weeks. Fiscal stimulus seems to be on its way and the Fed’s intervention is already here. We cannot be surprised if markets rebound despite an economic depression. Venezuela, for example, has had the best performing stock market for several years despite being Venezuela. A quick google search showed an article from 2016 which said: 

Venezuela’s Caracas Stock Exchange gained 114 percent in 2016, earning it the title of the world’s best performing stock market.

It is completely possible that a recession or depression occurs across the world, but stocks, bonds, and real estate skyrocket in price due to the amount of money that is expected to be produced in order to “fight” the economic crisis.

Let’s look at where the weekly Dow Jones chart looks as of close on March 27th, 2020:

Dow chart on 27-Mar-2020

Can the question be answered: Is this the bottom or is the worst yet to come?

The truth is that technical analysis is great and should be understood for serious traders, but contrary to what we may hope, it cannot predict the future. A person can read charts all they want, but they will never see a “buy the bottom” signal or “sell the top” signal from technical analysis. By the time a “breakout” has been confirmed, the bottom would have already passed as you may have noticed from the notes in the first chart posted above.

So far, we cannot see any “buy signals” to show that the chart is breaking out and positive momentum has been obtained. That being said, if one were to “call a bottom,” that is fine and some bottoms do look like this. If so, then the chart will turn shortly, all momentum indicators will turn positive, and the Dow should be approaching new highs soon. This is very possible considering that the Fed’s money printing should levitate stocks.

I mostly buy mining stocks and don’t buy “regular stocks,” but if I see 15,000 in the Dow, then I probably would. At the moment it feels like the ship has sailed, especially considering the wild gains and general level of joy seen in the media. But who knows what tomorrow brings, the next week, next month or next October brings?

See Fibonacci retracement from the low of 2009 to the high of 2020. The blue lines represent points of support and resistance that are automatically drawn when you start on 2009 low and connect it to the 2020 high. Do you notice any interesting patterns in the chart?

Dow Fibonacci 27-Mar-2020

Good luck in your trades.

EC


[1] Rahm Emanual, “Let’s Make Sure this Crisis Doesn’t go to Waste,” Washington Post, March 25, 2000, https://www.washingtonpost.com/opinions/2020/03/25/lets-make-sure-this-crisis-doesnt-go-waste/.

[2] The Panic of 1907, Stock Market Crash of 1929, Black Monday, all occurred in October, see https://www.investopedia.com/articles/financial-theory/09/october-effect.asp

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