Is the Dow Really Repeating the Great Depression Pattern?
Monday, July 19, 2010 at 11:03AM Below is a percentage change chart of the Dow Jones Industrial Average from its peak in 1929 and its peak in October 2007 going out 698 trading days (which is up until last Friday in today's market).
In early July, an article titled "Dow Repeats Great Depression Pattern" made its way around the web. The first paragraph noted:
The Dow Jones Industrial Average is repeating a pattern that appeared just before markets fell during the Great Depression.
The author of the report that was the focus of the article (who wrote another piece last week) noted that just before the 1929 crash, a head and shoulders pattern formed, and then after the Dow bounced following that crash, another head and shoulders pattern formed that preceded an even bigger fall over a number of years. He argued that a head and shoulders pattern also marked the beginning of the market crash in 2007, and that another recently formed head and shoulders pattern spelled doom for the markets.
“Those who don’t remember history are doomed to repeat it…there was a head and shoulders pattern that developed before the Depression in 1929, then with the recovery in 1930 we had another head and shoulders pattern that preceded a fall in the market, and in the current Dow situation we see an exact repeat of that environment."
Maybe we're not looking at it right, but to us, the 1929 pattern looks completely different than the current one.
Back in 1929, there was a head and shoulders pattern just before the crash, and then another head and shoulders pattern formed after an initial bounce that was followed by a multi-year downturn. But saying that the 1929 pattern is anywhere similar to the current pattern is a stretch. The 1929 crash lasted a few months, then a bounce occurred, and then the head and shoulders pattern followed five months later. The entire pattern lasted about 10 months. In the recent bear market, the declines lasted a year and a half before the first bounce occurred, and the bounce then lasted more than a year. Below are charts of the two multi-head and shoulder patterns that the article uses to argue that another big decline is coming. Again, comparing the 1929 pattern to the current one and arguing that it portends another crash seems like a stretch. Who knows, maybe another crash is coming, but it's hard for us to make the 1929 comparison.
The two charts below are over the exact number of trading days during the two periods. The red shading represents the head and shoulders patterns in each chart.
Reader Comments (9)
I believe we could have a downturn in the market.
However, we could also have an upswing. If the shorts jump in too early then have to cover. That happened two weeks ago when the head and shoulders pattern "completed."
It doesn't work to predict a head and shoulders (and every one expecting it piles on with shorts) if it doesn't break through.
It could be that by predicting the head and shoulders the writer could in fact have created enough momentum to go the other way when the shorts cover.
They say that most people lose money when trying to play the market. Could be true for the shorts also.
I prefer the inflation adjusted chart from 2000 on
http://dshort.com/charts/mega-bear-2000-comparisons.html?mega-bear-2000-extended
You should really plot what Louise Yamada has been saying for a long long time. She says that the entire market episode from 1928 to 1945 is being repeated all over again if you start your clock in 1999. By that count, the current year corresponds to 1939. It will be great if you could plot these charts. If Louise is right, and past is the prelude, then we are in for choppy market action for another five or six years.
The article on CNBC is referring to a similar pattern, not necessarily on the same time scale or percentage move. I have been watching this as well, but once CNBC reports anything I get skeptical.
I agree with the comment about Louise's assessment, especially if you use the Nasdaq composite from 1999 vs the Dow from 1929. I believe it's a fairer comparison as our economy today is more technology based, whereas it was industrial based in the 30's.
You're comparing the wrong time frames. Compare starting at DOW at 1929 and DOW at 2000, then look at the chart.
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.............. Yes, you are comparing the wrong time frames.