Is it really so different this time?
Kim Cramer Larsson
Technical Analyst, Saxo Bank Group
Summary: A look at two historic Dow Jones Industrial Average charts may help us differentiate between a minor correction or the start of a more profound sell-off in equities.
Let's take a look at two near-identical chart patterns representing the same instrument at two different points in time.
Zooming in on Chart 1, we see a double top formation with an 11% correction between tops and a bounce off the 55-week moving average. We massive Relative Strength Index divergence with the second top slightly higher than the first; this top is followed by a selloff to the 55-week MA.
The biggest difference between Charts 1 and 2 is the time between tops.
This is a weekly chart of the Dow Jones Industrial Average index, the oldest stock index in the world.
Here we see that the second top was slightly higher than the first, and in fact marked the index's all-time high in early October 2007. Thereafter, the index dropped to test the 55-week MA before recovering into December (a short Santa Claus rally).
Bears regained control around year-end, taking the DJI Index below the 55-week MA. In Q1'08, it was close to the 200-week MA. The rest, as they say, is history – the history of the Great Financial Crisis, that is.
The chart below is Chart 2, zoomed out. It's the same index as above, the Dow Jones Industrial Average Index, and this also a weekly chart: it's just a different period in time.
This chart is for the 2016-now period.
The second top is currently the all-time high recorded in early October, just slightly above the previous top. The index, meanwhile, is currently trading around the 55-week MA.
What will happen next?
If history repeats itself, we should see a couple more weeks' worth of choppy markets and a short uptrend going into December before next sell-off hits, taking the market down close to the 200-week MA in Q1'19.
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