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Dow Approaching the Cliff

By , Sr. Technical Strategist
04 June 2010 22:05 GMT

Equities continue to follow the pattern that preceded the 1929 and 1987 crashes, especially as it relates to time.  To recap, the initial leg of the 1929 decline lasted 23 days.  A 5 day correction was followed by the next down leg, which lasted 12 days.  The initial low was broken on the 6th day of the 3rd down leg and the decline began to accelerate considerably on the 8th day.  At the crash low (12th day low), the DJIA had shed 45% of its value from the September 1929 top.  The 11th day was the first “Black Monday”.

DJIA 1929 (daily)

 J-10-06-04-01

In 1987, the first leg of the decline consumed 19 days and the following correction lasted 8 days.  The initial low was broken on the 6th day of the 3rd down leg and the decline began to accelerate considerably on the 8th day (I didn’t have to change that sentence at all).  At the crash low, the Dow was off 38% from its August high.  The second “Black Monday” was the 12th day.

DJIA 1987 (daily)

J-10-06-04-02

Now, in 2010, the first leg of the decline consumed 21 days (as opposed to 23 and 19) and the following correction lasted 6 days (compared with 5 and 8 days).  IF the Dow continues to follow the ‘crash path’, then the May low would be broken late next week (the 6th day is Friday the 11th).  The decline would accelerate the following next week.  12 days for the crash leg of the decline and 40% (compared with 45% and 37%) would result in the Dow at 6755 on June 22nd.  Interestingly, June 21st is a Monday. 

Again, this is simply a forecast based on historical patterns in price and time.  If the current situation begins to diverge from the path laid out here, then we’ll know that something else is probably in the works.  Clearly, the implications for FX (and all markets) are extraordinary.  I’ll discuss this as next week progresses.   

DJIA 2010 (daily)

J-10-06-04-03

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Friday evenings), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary and trades at DailyFX Forex Stream.   Send requests to receive his reports via email to jsaettele@dailyfx.com.

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04 June 2010 22:05 GMT