Because the market was near 52-week highs this summer when we had the fast and ferocious crash, I have been more apt to compare the technicals to that of a 1998 scenario rather than the typical washout/panic low that you see in the late stages of a bear market. The psychology is usually much different in the scenarios that I just noted, which means the technicals are bound to reflect a different response to a crash. Whereas the major bear market lows in 2002-2003 and 2008-2009 took anywhere from 6-8 months to be completed, the market in 1998 recovered rather quickly from a sudden cascade. Now, I recognize that 1998 was in the midst of both a powerful secular and cyclical bull market. Technically, we are still in a cyclical bull market since March of 2009, since we have yet to come down a full 20% from the May 2nd highs of 1370 (we have a 19.6% correction in the cash market).
Essentially, 1998 saw a ferocious sell-off not unlike what we saw this summer, followed by roughly two months of flopping around before eventually breaking back higher. In the current market, we came down to 1120 and precisely 1101 on the S&P 500 in early-August, and have since held those lows while also flopping around for nearly two months.
Now, here is the important point: Just because the 1998 scenario looks sexy for the bulls does not mean that I am disrespecting the carnage that has been seen in many areas of the market. I see those potential and fulfilled bearish consolidations across the board just as you do, such as in the coal space. I have been focused on a highly selective hit-and-run trading style, with preservation of capital as a core tenet. I currently sit in 100% cash.
Just know that while history does not necessarily repeat, it does rhyme often enough to justify being willing to change your bearish bias on a dime, should the market continue to not meaningfully breach those summer lows.
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The Fly is God
Chess, awesome insight. Thanks for posting your analysis.
Thank you
did asia run the world back then? it seems the leaders of the now world are the ones blowin up. like the chart set up. just seems the situation is of a higher magnitude this time.
Agree with this one – back then it was Russia and Asia blowing up, which hardly mattered. Now it’s Europe blowing up, which is magnitudes more significant.
On the 2011 chart all the action is below the 50 ma. More Bearish scenario, no?
It is a 9-day chart of the S&P 500 (I used it because I thought it most accurately captured the comparison between the two time periods). So, the moving averages are not as big of a concern to me. The price action and psychology is.