Modelling the 1929 DJI crash to today
A roadmap plan for if the weird should become the real.
If you’re a new reader please first see the previous posts. They deal with some of the common reasons you may think this form of analysis could not work and also give some pre-context as to why we think a high in the DJI could be being made in this specific price zone we’re in.
If you’ve read these already or have followed the previous real time analysis aimed at showing the efficacy of these methods, you can skip to the body of the post.
Goals of Analysis
This is intended to plan for a possible outcome in the future rather than “Predict the future”. The work is descriptive rather than prescriptive, but it does aim to give a set and actionable trade plan to protect or profit in the event of us seeing extremely erratic markets that would happen to fit inside historical models.
We’ll look to create a roadmap of the possible swings and then look to determine areas where bearish trades could be taken and (More importantly) the points at which profits should be taken on these to prevent them being degraded by bullish moves (These might not even be full reversals, but enough to make good trades go bad).
We’ll establish some benchmarks in the trade plan and also the price moves that would show the analysis to be invalid and dictate the trade plan be abandoned.
Starting Chunks
We’ll start by looking for some chunks to give us reference points on which to build our road map. The chunking concept was explain in a previous post.
The clearest chunks to use are the AB=CD (Two equal legs) like formation into the high in 1929.
We’ll use these because they are clear points we can see and help up to establish some clear structural highs and lows and also because we were able to identify this as a possible setup in the SPX before it actually appeared on the chart - so we’re not working all on hindsight.
This forecast was made during this drop in the SPX and was given as the warning/contingency plan to possible short entries at the time. It’s in the lower part of the post, the first part covering the conditions we’d have to see for us to think an actionable break was being made in the SPX at the time.
We’ll also stick with the SPX as the subject of analysis even although we’re working off a DJI chart for the model since SPX is far more popular and probably preferable for many people when it comes to things like options trading. The crash template model I believe to be generic across markets. These concepts were used for the forecast of the first 50% drop in BTC in 2021.
Establishing Key Areas and Signals
Now we have our chunks what we want to do is take markers of important price moves around these chunks which are things we’d be able to spot in real time in the SPX if it was to happen. Things that’d give us some real foresight into whether or not we were making moves significantly similar to the DJI model.
We have a three step warning. Multiple steps are useful since they reduce the probability of the market triggering our trade plan by making a random move that we forecast. It has to make multiple moves, consecutively, to trigger the plan. Lengthening the odds of it happening randomly and lending credence to the idea we can use this type of modelling to make forward looking forecasts.
And when we take the current SPX chart we can readily mark in these areas. It is very obvious where they’d be if we were in fact in an identical version of the move.
Doing this we can pretty easily determine where our important warning breakout level would be. If the market bounces somewhere in this area, then the market makes a fast high close to the high of our first chunk then we treat the low made in this swing down as our critical breakout level.
When the market is trading under there, we treat it as a trend break and not a “Dip”.
And to trade and/or hedge we’d look to take shorts into any of the rallies.
Checking for Confluences
If this theory holds any water now that we’ve mapped out the weekly chart similarities we should be able to drop into the daily chart and see things that look the same. As per random walk ideals this would seem unlikely but as per model ideals it would be a red flag if we could not see something similar.
Here is the DJI as it slides off.
Range high. Decline. Range with shallow bull rally and then into the more obvious slide.
Here is SPX.
This would look fairly similar to here. The folks in 1929 would have had a similar opinion on what the market is doing at this point as folks today have. The attitude would have been significantly similar. You can look up newspaper clipping from the time and compare them to media/social media right now.
If you know how to read these price bars you’ll see that (In all probability) at the time the real action of these down days was price rallying during the opening hours of the market but then crashing late into the day. This is what most likely created these style of bars. We know for sure the market traded up these days and closed low.
And that is exactly what we’re seeing in the SPX right now. I am using candles covering all of the futures hours trading as well so it’s not so pronounced but anyone who’s watched the markets the last few days knows they’ve been aggressively up at points during the US market. Started to sell off about 3 hours before the close and then been bloody into the last hour.
In all probability, this is exactly what was happening in the topping of 1929.
Obvious Complimenting Patterns
I doubt as many people have geeked out on the specific swings of the DJI high of 1929 as I have to notice these swings seeming to match up (And fewer still I’d imagine have derived models from this which they use for real trading, which makes me treat this stuff much more actionably and follow markers closer) - but I am not the only bear.
I am not the only person looking at a chart and seeing some sketchy signals. Even at the most basic level we can see the SPX currently has the traditional signs of a head and shoulders pattern and it has broken the 200 SMA on the daily chart.
Adding a 100 SMA we can see it was a good support level and has a strong break.
Were price to decline a bit more and trigger our warning signal, we’d also be seeing traditional warning signals of moving average cross-overs.
Using simple Bollinger bands we’ve broken the middle band for the first time in the big rally from the lows and again we’d be seeing more break signals in this of the lower band of price was to continue and make our warning breakout.
All in all it would seem there are various forms of analysis that would pick up warning signals by the time SPX was trading in this zone.
Invalidation Markers
The obvious and easy way to invalidate the original trade plan is price should not trade a new high if this is happening.
There are some additional ones that can be used if price makes lower lows which can reduce the amount of tolerance we’d have to have for price moves against us (Flashing warnings to exit before a new high was made). These will be easier to cover if and when we come to them so we’ll leave them out for now.
Another scenario we need to consider is the chunks used here are too small and we actually should be looking at these are our topping chunks.
These would not present all that many problems in regards to shorting, but they’d make it very confusing trying to pick entries. We’d expect the market to be bullish a while before it was and get a few surprises. I actually think this scenario is significantly likely - the one covered above being a bit more optimistic.
These being the more actionable chunks would be flagged up to us by the market declining in the week ahead and getting quite a bit lower than the current price. With the other chunks the low should be made or be coming significantly soon - Down trending moves sustaining would make this the actionable trade plan.
These will need only very small adjustments to the macro trade plan. The only issue getting this part wrong at this stage would cause would be flagging up bullish signals too easy for those wanting to speculate on short-term moves. By the end of next week we should be able to do a far clearer version of this trade plan.
Now We Wait
At this point there’s no point getting more detailed into the trade plan as it pertains to trading the swings of the actual crash were it to happen. We’ll be able to do a much better job of this trade plan if we’re able to determine a breakout is being made. Then we can look at other ways to chunk moves and find expected target levels.
We will update on these in the weeks ahead if a breakout is made and it’s required to plan for that possible eventually in more detail.