Saxo Bank uses cookies to give you the best online experience. By using our website you agree to our use of cookies in accordance with our cookie policy.
Okay
General.Accessibility.Close
EQUITIES 6 minutes to read

Is it really so different this time?

Kim Cramer Larsson

Technical Analyst, Saxo Bank

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.

The ongoing sell-off in equities has seen the benchmark US indices lose hold of key long-term support levels even as some investors continue to insist that it's just another buying opportunity. Is this time really so different, one wonders, or is history preparing to repeat itself?

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.
Enlarge
Source: Saxo Bank
Now let's look at Chart 2. Here, we another double top with a 12% correction betweemn the tops close to the 55-day MA; RSI shows massive divergence. Again, the second top is slightly higher than the first and 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.
Enlarge
Source: Saxo Bank
Look at Chart 1 again – this time, we will zoom out a little.

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.
Enlarge
Source: Saxo Bank
Memory is a funny thing. You might say, “yeah, but that was the Financial Crisis – things are different now”. But the fact is that the double top shown above occurred before the crisis. In 2007, no one expected a bear market to unfold as it did in 2008. 'Crisis' wasn’t even a term in discussion at the end of 2007! 

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.
Enlarge
Source: Saxo Bank
Maybe it really is different this time... but it usually isn't. This is, at least, something worth considering before dismissing the current sell-off as a mere buying opportunity.
Share

You can access both of our platforms from a single Saxo account.

Try the Demo
Open Account

Related Articles

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)