Is the DJIA Setting Up For a Crash?

I’ll ever forget that phone call on Black Monday, October 19th 1987. I was in college and just starting to build an interest in the financial markets, however, a friend of mine was actively trading OEX options from his dorm room at a school across the country.

“Dude! I did it, I did it, I nailed the big drop!” came the screaming voice across the pay phone line.

“What are you talking about,” I stuttered.

“The market has dropped over 500 points and my OEX teenies have gone up at least 50x, I now have my stake, I am dropping out of school and becoming a pro-trader in Chicago”

“Cool, Man. Good Luck,” I said before the line went dead.

I know my friend was down to his last $10,000.00 from his Grandmother’s inheritance, losing most of it making these bets earlier, and prior to his big score. Needless to say, this story doesn’t end well, due to lack of money management and continual need to make another big score.

The last several days have given me flash backs to the 1987 crash. Are the markets setting up for another big drop, is it even possible? The market was ripping up in 1987, it had hit a new all time high just 8 weeks prior to the Black Monday. The Wall Street Journal stories lay out the massive change in sentiment.

On 8/26/1987, the day after the 1987 market top, one quote read “In a market like this, every story is a positive one, any news is good news. It’s taken for granted now that the market is going to go up.”

Just 8 weeks later the day after Black Monday, “Stocks Plunge 508, Amid Panicky Selling” appeared in the Journal. Those 8 weeks between the high and Black Monday are important to look at. There was a sharp sell off, then a rebound to near the high on the weekly chart, then the huge drop.

It’s important to note that markets always tip their hand prior to a crash. The initial sharp sell off is what alerted my friend to the crash potential, along with other esoteric TA he studied.

As you can see from the current weekly chart of the DJIA, it is only remotely similar to the 1987 chart. There has been 28 weeks between the highs and today, not just 8 weeks. Could this time simply be extended due to size differences in the index from 1987? It’s hard to tell, but possible.

In addition, there is massive underlying bad news in the markets. Things are not all positive like they were in 1987 prior to the crash. Can crashes happen without extreme positive sentiment first? This is something worthy of further research.

What’s going on today, how can I catch a potential crash?

I believe the YM and the channel system provide the best shot at catching a big move in the DJIA. This is how I am setting up for today. The lower channel line is at 12597 on the June YM contract. I have the upper line set at 12703 just in case we get a severe reaction on the upside today.

We had about a 25 minute spiking uptrend, from 8:30 AM, off of the positive employment numbers today. However, price has dropped back and is marginally lower at this time.

With the channel, you can be ready for whatever way the market breaks.

Good Luck!

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.