The Great Depression Fractal Returns! (Part IV - Mania)
Time for a necessary update on the stock market - namely the Dow Jones Industrial Average. I decided to draw this one using the pitchfork tool, to create parallel channels for accuracy. My other DJI charts were drawn with more of a wedge. This chart uses a slightly different model, so some price targets may be revised from my initial speculations.
Back in December 2018, I anticipated the drop and then suggested that consolidation and then an eventual move up would be possible, based on the strength of the bounce. As you can see when comparing the 1920's bubble with the current stock market rally, price action would end up being nearly identical. Without further ado, let me call your attention to the main features of this chart:
A) The Main Uptrend Resistance (red) - The DJI has followed this trendline pretty closely since the 1929 crash. Since 1931, that red trendline has served as major resistance in 1937 and then repeatedly between 1999 and 2001. It was also major support in the run up to the 1929 crash.
B) First Uptrend Support (light blue) - This trendline has numerous touches, and it has served as more of a pivot area than anything else. It probably has the most reactions compared with any of the other lines on this chart. It was major resistance from 1944-1954, major support from 1954-1969, major resistance again from 1969-1995, and has mostly acted as support (except a brief dip below during the 2008 crisis) from 1995 until the present. Our recent December dump actually bounced perfectly off this trendline. This one is very important.
C) Lower Uptrend Support (purple) - This trendline has been respected ever since the bottom in 1932. We briefly slid below it during the financial crisis in the late 70's/early 80's, before staying well above it until we bounced heavily off it in 2008. During an eventual stock market correction, I'd expect this support to be tested again. This line should be watched for any potential growth slowdowns. If the Great Depression Fractal is to complete, we may even break below it. This would indicate a severe period of consolidation and slowed down growth (I actually think this would be healthy). This brings me to the next feature of my chart.
D) The broadening triangle fractal (orange) - This is an interesting one. You can see that we bounced twice on a similar triangle prior to the Great Depression (two hammers on the bottom left of the main chart). We also did the same thing in 2002 and then again in early 2009. Trump's election spurred a breakout above the top resistance of the triangle, just as we did in 1925 before our final blow off top. If we are to follow exactly what happened after 1929, the DJI could drop all the way to the bottom triangle support, (indicated by the red finger). This would be a major technical failure, and would cause the DJI to drop out of its long term uptrend, if perhaps only briefly.
C) The Blow-Off Top - The Dow Jones rallied from about 150 to 400 - a 2.66X increase once that broadening triangle resistance was broken. If the DJI did the same today, that would place a potential blow-off top target at around 50,000 - give or take a little. The reason I set this target is because the orange triangle was broken at around 18,950. A factor of 2.66 from there is 50,407. This means that the stock market could double up from here in a "mania" phase. I've changed my targets a bit from my previous analysis, because I'm looking more carefully at it. We could also get stopped by that red resistance before reaching 50K. If we break above those areas, I'd actually look for a longer stock market growth period. This would be interesting, as it would go against the economic downturn that almost everyone is expecting. This would mean that the stock market could just continue growing....all the way until another channel resistance is formed.
Here is the comparison between the 1920's and present day:
1920's chart, where you can see that we might be about to begin a final bubble phase:
Present Day Chart And What A Similar Crash Could Look Like:
Anyway, I think the similarities are pretty clear. Whether or not it plays out remains to be seen. Perhaps the economy can figure itself out, and growth can be made in new areas (clean energy/environment, for example). This is a SHORT setup (if that orange triangle support is broken to the downside, but for now we can expect that prices MAY increase for a bit longer (even a couple more years)...barring any major disaster. A disaster could send us down to that purple support sooner. Likewise, this is a LONG setup if the most recent high is breached. I don't expect this to be a long term trade though. I personally don't feel comfortable buying stocks for the long term here.
This is not financial advice. This chart is for future reference and is based entirely on speculation and my personal opinion. I'm not an expert - just a hobby analyst. Additionally, I personally believe that many tech stocks are overvalued, and that people might soon collectively lose interest in certain progressing technologies. For example, I think Apple stock is nearing a plateau. As such, I think we're nearing the end of a rally for many tech stocks. I think we've been in a bit of a bubble there for the last 15 years or so. I'm also curious to see how cryptocurrencies end up factoring in to all of this (and whether or not they will become a factor at all). Anyway, that's it for now!
-Victor Cobra
Back in December 2018, I anticipated the drop and then suggested that consolidation and then an eventual move up would be possible, based on the strength of the bounce. As you can see when comparing the 1920's bubble with the current stock market rally, price action would end up being nearly identical. Without further ado, let me call your attention to the main features of this chart:
A) The Main Uptrend Resistance (red) - The DJI has followed this trendline pretty closely since the 1929 crash. Since 1931, that red trendline has served as major resistance in 1937 and then repeatedly between 1999 and 2001. It was also major support in the run up to the 1929 crash.
B) First Uptrend Support (light blue) - This trendline has numerous touches, and it has served as more of a pivot area than anything else. It probably has the most reactions compared with any of the other lines on this chart. It was major resistance from 1944-1954, major support from 1954-1969, major resistance again from 1969-1995, and has mostly acted as support (except a brief dip below during the 2008 crisis) from 1995 until the present. Our recent December dump actually bounced perfectly off this trendline. This one is very important.
C) Lower Uptrend Support (purple) - This trendline has been respected ever since the bottom in 1932. We briefly slid below it during the financial crisis in the late 70's/early 80's, before staying well above it until we bounced heavily off it in 2008. During an eventual stock market correction, I'd expect this support to be tested again. This line should be watched for any potential growth slowdowns. If the Great Depression Fractal is to complete, we may even break below it. This would indicate a severe period of consolidation and slowed down growth (I actually think this would be healthy). This brings me to the next feature of my chart.
D) The broadening triangle fractal (orange) - This is an interesting one. You can see that we bounced twice on a similar triangle prior to the Great Depression (two hammers on the bottom left of the main chart). We also did the same thing in 2002 and then again in early 2009. Trump's election spurred a breakout above the top resistance of the triangle, just as we did in 1925 before our final blow off top. If we are to follow exactly what happened after 1929, the DJI could drop all the way to the bottom triangle support, (indicated by the red finger). This would be a major technical failure, and would cause the DJI to drop out of its long term uptrend, if perhaps only briefly.
C) The Blow-Off Top - The Dow Jones rallied from about 150 to 400 - a 2.66X increase once that broadening triangle resistance was broken. If the DJI did the same today, that would place a potential blow-off top target at around 50,000 - give or take a little. The reason I set this target is because the orange triangle was broken at around 18,950. A factor of 2.66 from there is 50,407. This means that the stock market could double up from here in a "mania" phase. I've changed my targets a bit from my previous analysis, because I'm looking more carefully at it. We could also get stopped by that red resistance before reaching 50K. If we break above those areas, I'd actually look for a longer stock market growth period. This would be interesting, as it would go against the economic downturn that almost everyone is expecting. This would mean that the stock market could just continue growing....all the way until another channel resistance is formed.
Here is the comparison between the 1920's and present day:
1920's chart, where you can see that we might be about to begin a final bubble phase:
Anyway, I think the similarities are pretty clear. Whether or not it plays out remains to be seen. Perhaps the economy can figure itself out, and growth can be made in new areas (clean energy/environment, for example). This is a SHORT setup (if that orange triangle support is broken to the downside, but for now we can expect that prices MAY increase for a bit longer (even a couple more years)...barring any major disaster. A disaster could send us down to that purple support sooner. Likewise, this is a LONG setup if the most recent high is breached. I don't expect this to be a long term trade though. I personally don't feel comfortable buying stocks for the long term here.
This is not financial advice. This chart is for future reference and is based entirely on speculation and my personal opinion. I'm not an expert - just a hobby analyst. Additionally, I personally believe that many tech stocks are overvalued, and that people might soon collectively lose interest in certain progressing technologies. For example, I think Apple stock is nearing a plateau. As such, I think we're nearing the end of a rally for many tech stocks. I think we've been in a bit of a bubble there for the last 15 years or so. I'm also curious to see how cryptocurrencies end up factoring in to all of this (and whether or not they will become a factor at all). Anyway, that's it for now!
-Victor Cobra
Comment:
Oops, C) The Blow Off Top was meant to be E). I always mess up with something and then I can't change it :P You get the idea.
Comment:
It's possible that Stage E) The Blowoff Top is now beginning. Hold on to your horses for the next 2 years. Things could get pretty crazy.
