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May 23, 2006
1987 All Over Again
The Times.co.uk reports:
”A report by Barclays Capital says the run-up to the 1987 crash was characterised by a widening US current-account deficit, weak dollar, fears of rising inflation, a fading boom in American house prices, and the appointment of a new chairman of the Federal Reserve Board. ”
There was not much time to get out in 1987 as the index dropped from 450 to 300 in two months. The big gap on 19-Oct is known as black Monday and selling continued the next seven days.
Prior to black Monday, there was a bearish chart signal as the index formed a weekly bearish engulfing on 9-Oct and gapped down the very next week with another black candlestick (16-Oct). This gap broke support from the September low and confirmed the bearish engulfing. Notice that the index never filled the gap and the inability to recovered shows just how weak the bulls were. The window from 9-16 October was small, but provided a chance to either reduce exposure or hedge positions.
What about now? The Nasdaq broke 2200 in November and worked its way high in 2006. The index moved from 2200 to 2380 from January to May and then lost it in two short weeks. That is a lot of work going down the drain and this is not the stuff bulls are made of. I consider this decline excessive for just a bull market pullback, but prefer to refrain from predicting a crash. Right now the November breakout at 2200 has failed and this is enough to be bearish on the Nasdaq.
Posted by Arthur B. Hill at May 23, 2006 08:56 AM