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Technical Implications from Last Week’s Equity Plunge

Technical Implications from Last Week’s Equity Plunge

2010-05-11 18:14:00
Jamie Saettele, CMT, Sr. Technical Strategist
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There have been just 2 instances in the history of the US stock market (as measured by the DJIA) when a 10% intraweek decline followed a top that was preceded by a 52 week rate of change of at least 50%. Those 2 occurrences were the weeks that ended October 25th 1929 and last week. The former is the week prior to what is referred to as Black Monday (10/28/29) and the stock market crash of 1929.

*I understand that last week’s decline is being blamed on a number of factors, ranging from algorithmic trading to someone hitting a B instead of an M (billion as opposed to million). There is always a ‘reason’ that something might have happened. In 1929, margin accounts were blamed…in 1987, program trading was blamed. Bottom line; it happened. More importantly, it happened after a rally that reversed at the 61.8% retracement (see below).

 

DJIA 1929 (weekly)

SR511a

In both instances, the actual highs occur 8 weeks after their 52 week rate of change extremes (67% in 1929 and 59% in 2010). The 1929 decline occurred following a new all-time high while the 2010 decline occurred following a retracement (of 61.8%) of the decline from the 2007 high. Either way, the implications are that last week’s wild ride is the beginning rather than the end of a larger decline….and perhaps even a crash.

 

DJIA 2010 (weekly)

SR511b

As it pertains to FX, look to sell higher interest yielding currencies against the US dollar. The AUDUSD, in particular, is a short candidate. There is the specter of a double top at 9400 along with a break below the year + channel and 13 week SMA. 9130 is potential short term resistance.

 

AUDUSD (weekly)

SR511c

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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