Dow Jones Industrial Average: 1929/2014 Stock Market Crash Correlation Charts

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February 18, 2014 4:30pm NYSE:DIA NYSE:SPY

dow 13000Thomas Carreno: Perhaps you have seen or heard about the 1929 2014 correlation chart that has received quite a bit of publicity recently (Tom Demark and Mcclellan) It has been fascinating to see the market action as measured by the Dow Jones Industrial Average

 (INDEXDJX:.DJI) follow the 1929 parallel very closely in terms of the number of days of each decline and advance leg and also the percentages.

I have calculated that the percent magnitudes of each leg in the current market is about HALF of what occurred in 1929. So if history repeats we should be on the verge of an approximate 22% drop from the February 14th, 2014 high in the DJIA to the ultimate low.

Right now we are in a very critical trading zone where the DJIA absolutely MUST conform to a few price rules starting next week. If it does not start to follow the below mentioned rules very very closely then the entire crash/panic scenario starts to become highly doubtful.

1929 price chart

1929 Price Chart

In summary here are the rules. Starting next week the DJIA absolutely cannot trade higher than 16,176 on a closing basis (We must trade down on Tuesday in the DJIA. Monday February 17th, 2014 is Presidents Day holiday so stock exchanges are closed Monday).

The DJIA should start to trade down next week and start to show some strong weakness right from the get go. Ideally the weakness should occur almost every day next week.

The trigger for the pattern similarity to truly engage is a move below 15,700 in the DJIA. 15,700 marks a very key support zone and if it is broken could start to trigger a panic similar to the 1929 correlation pattern. Note that in both charts below the two horizontal blue lines in both time frames marking critical support and resistance. In 1929, the breaking of the lower horizontal support line essentially activated the panic and stock market crash.

1929 price chart

1929 Price Chart

2014 DJIA Price Chart

2014 DJIA Price Chart Crash comparision

The breaking of the lower support line in 1929 also led to a bearish downside crossover of the MACD. This led to 16 full trading days of panic price action and a decline near magnitude of 45%. As long as the MACD remained in bearish crossover mode the sell signal was still engaged.

As one can see clearly in the current 2014 time frame we do not have anything close to a bearish MACD downside crossover as occurred in 1929. However if we see persistent price weakness in the DJIA next week then such a bearish MACD downside crossover could start to become a possibility.

I will say that anytime you see an MACD that is trying to move back up above the zero line after having already crossed under it marks a critical juncture in any stock or market index. A bearish downside crossover that occurs in the MACD under the zero line can lead to very significant market or stock weakness and sometimes persistent weakness.

The 1987 crash had a similar setup in the MACD. The MACD crossed under the zero line in mid September 1987 and then tried to rally back above the zero line in early October 1987. But then the price became reluctant and we witnessed a downside bearish MACD crossover under the zero line. The next 8 trading days after that led to that stock market crash.

I really do not know if the correlation is going to continue. The topic has been brought up so many times in the media by now and in most instances it has been ridiculed and written off as a fantasy. Maybe so. I do admit that the strength we are seeing in other indices and ETFs such as Nasdaq 100, SMH semiconductors, Biotech and even the SP500 makes me doubtful we will be able to generate enough weakness next week to get this ball rolling to the downside. But I will let the market decide that next week.

The parameters again in summary:

  • We must not close price higher than 16,176 in the DJIA next week.
  • We should start to see rapid price weakness next week especially early in the week.
  • We should witness a BREAK in the DJIA under 15700 that coincides with a BEARISH MACD CROSSOVER.

If all three of the above occur over the next week or two then I will have to conclude that the pattern correlation between 1929 and 2014 is still working and we could possibly see a crash that is half the magnitude of the 1929 time frame.

I will post an update on this scenario each day next week if we continue to see the parallel working.

This article is brought to you courtesy of Thomas Carreno From Best Online Trades.

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