Wednesday

Dow Jones: The Anatomy of a Crash

3 Comments March 4, 2009 – 5:49 am |   | Permalink |  Print This Post |

Those who have been trading in the last few weeks will know that trying to catch the turning point is a very costly game. The Dow has dropped by 19% since this decline started on 8 February (8300 to 6700). Trend followers who have been shorting will have made a nice profit. TheInflationist have analysed recent charts, specifically looking into the statistics of significant declines. One of the key common findings  in all recent declines are that most of the recovery/retracement of that decline happen in the first few days of the turning point. Beyond that, the upside is minimal (relative to downside, assuming further downtrending). So, when this thing turns around, if you do not catch it by day three (assuming all three up days), it may be worth waiting. Some of the statistics during the last few declines are listed below:

Present

• 19% so far
• 23 days and counting… (9th Feb - present)
• 9.4% lower than previous low

November 2008

• 22% fall (9620-7440)
• 16 days
• 73% of drop retraced: 1620 points (7440-9060)
• First 3 days: 71% of retracement (intraday peak 8596)
• 6% lower than previous low

October 2008

• 30% fall (11200 - 7880)
• 12 days (29 Sept - 10 October)
• 61% of drop retraced (7880 to 9905)
• First 3 days: 100% retracement (intraday peak 9905)
• 24.9% lower than previous low

June 2008

• 14% drop (12600-10820)
• 34 days (4 June-14 July)
• 58.9% of drop retraced (10820-11870)
• First 3 days:  67% of retracement (intraday peak 11527)
• 7.6% lower than previous low

Conclusion:

• Most of the recovery happens in the first three days of the turning point. So if you are not in by day 1-2, stay sideline and wait for a pullback
• Most recoveries retrace by at least 50%
• March is “the month” of turning points historically
• If you anchored a long at 6700, and markets continue to drop, for the market to go down and not get back to 6700 at least (ie for you to at least breakeven), it needs to go to 5100 (that is assuming 50% retracement, most are about 60% at least). So if you have absolutely no position, an anchor at this level is safe.

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