Dow Index sharp losses; recalls Ghost of Black Monday 1987

Yesterday was the anniversary of the Black Monday stock market crash in 1987. Looking at the technical picture of stock markets around the globe, I cannot help but notice that alike 1987, global stocks may be in line for a correction.

Lets recall some of my earlier contributions:

18 October 2012 – In this article, “KLCI prints recurring chart pattern; is third time different?” that is going to be published in the coming Malaysian Edition (print) of SharesInvestment, I pointed out that although the Kuala Lumpur Composite Index is strong and at all-time highs, it has printed a wedge pattern and is potentially bearish at market tops. As evidence, we can see charts going back to 2007 and 1995. Unless this time is different, the wedge pattern is going to score a hat trick.

16 October 2012 – In this article on the French stock index CAC40 “Trendlines and chart patterns on France CAC 40 index“, the charts clearly print a confluence of resistance. All stars aligned. Based on the close of yesterday’s trading session, price has closed in a lower high below a previous potential left shoulder.  This is a potentially bearish development that should be followed closely.


Despite unlimited quantitative easing, Dow Index prints a bearish technical setup

Monetary policy may be finally losing its magic on the stock markets. We can see on a weekly chart of the Dow Jones Industrial Average futures index that same big-picture wedge formation.

The important input from market sentiment cannot be ignored. We can see two attempts to move outside the resistance zone. But in the last two weeks, the market closed with losses despite strong mid-week gains.

DJ30 chart

A chart of Dow Index futures prints bearish setup with wedge and fall below resistance

Markets cannot rally forever; moves in zigzag pattern

It is a truism that markets cannot rally forever. Rallies lead to excessiveness and malinvestment that is followed by correction. Only when prices  correct to fair value will smart money be interested to takeover. Technically, chart readers believe that prices move in zigzag. Hot rallies lead to profit taking by buyers while sellers are emboldened by over-valuation. Prices have to retrace enough to induce buyers to commit. Similarly sellers will stop selling only when they believe that they cannot gain further from the downside.

In the next posting, I will be putting up a chart of the Hong Kong Hang Seng stock index that is also printing a potentially bearish setup.


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