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Equities and AUDUSD on Paths Seen Before

Equities and AUDUSD on Paths Seen Before

2010-05-27 22:39:00
Jamie Saettele, CMT, Sr. Technical Strategist
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With the Dow staging an impressive rally, I wanted to view recent price action and see how it compares with the 1929 and 1987 crashes. The 1929 and 1987 crashes show remarkable similarity with respect to time. So far, 2010 is following the script.

In 1929, the first leg of the decline took 4 weeks and shaved 17% off of the Dow. A 60% retracement resulted in the secondary top and crash. At the crash low, the Dow was off 45% from its high.

equitiesaud052720101

In 1987, the first leg of the decline took 4 weeks and shaved 10% off of the Dow. A 65% retracement resulted in the secondary top and crash. At the crash low, the Dow was off 38% from its high.

equitiesaud052720102
This week marks the 4th week since the top. At the low on Tuesday, the Dow was off a bit more than 13%. If the 1929 and 1987 time pattern holds, then the secondary top will be made next week (a 60% retracement would be at 10665). At the 1929 and 1987 crash lows, the declines from the top were 45% and 38%. A 40% decline from the 2010 top (11258) results in the Dow at 6755 (close to the 2009 low). If the time pattern holds (crash low 3 weeks from the secondary top), then the Dow will reach that level by the 4th week in June.

Understand that this is simply an observation and history does not always repeat. For example, the Dow may not retrace 60% of its recent decline….it may retrace more or less. It may crash before or after the suggested time frame, or it may not crash at all. However, history can be used as a guide to get an idea for what may happen and when.

equitiesaud052720103

As mentioned in the May 11th article, “look to sell higher interest yielding currencies against the US dollar. The AUDUSD, in particular, is a short candidate.” After breaking below its February low, the decline extended before reversing. The red shaded bars indicate days that saw a rally of at least 3%. Today’s rally is similar to the 3% rally that occurred in September 2008. In both instances, the AUDUSD rallied from a low that occurred after a break of major support. Look for resistance at 8575-8600 (breakout level). Targets are 7700 (double top measuring) and 7270 (where the decline from the top would consist of 2 equal legs – also former resistance).

equitiesaud052720104

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Monday evenings), technical analysis of currency crosses on 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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