In 1987 the Financial world was hit with a major crash in Equities. Starting in September within two months S&P500 dropped 35% with most of the sell-off taking place in a few days in October. 19th October alone market dropped 20%.
It took two years to recover and from there on market didn’t look back much. Until 150 months later where we saw the peak in the .com bubble March 2000 with a gain of more than 600%. Of course with a few corrections on the way to the peak, most notably the major correction in August-September 1998 the famous Long Term Capital Management Fund collapse. Market got saved by FED.
In 2008 the Housing bubble/Credit crisis also known as the Financial crisis hit the markets sending the S&P500 down with more than 50%. Markets bottomed out in March 2009. Here the recovery took a bit longer almost 4 years. However, a long term bull market was founded.
A few major corrections since with the biggest one last year due to world-wide lock downs only shortly halted the bull market. A bull market where we have seen gain of almost 600% but that could very well has come to an end. 150 months since the March 2009 trough.
The development on RSI is interesting. Every time there has been major Divergence on RSI it has been followed by a big correction, crash or major bear market. On the chart the Divergencies are indicated with the blue falling lines on the RSI peaks. The current period with divergence is the second longest period with divergence lasting more than 3½ years. During the .com bubble it lasted a few months longer.
Falling RSI values while prices are rising is an indication of a weakening trend. Divergence can go on for quite some time but not forever, eventually is has to be “traded out” i.e. either a new higher high or a drop below 40.
The first Monthly chart going back to 1986 is a Logarithmic scale chart to better illustrate the magnitude of the previous corrections/down trends compared to today’s market.
Zooming in on the Monthly chart (second chart) we can see that September formed a Bearish Engulfing candle which is a top and reversal candle. Bears seem to have taken control from in September.
With the S&P500 is being very far from its Moving Averages, it is in fact the farthest it has been from it since during the Financial Crises and during the built up to the 1987 crash, it is ripe for a correction. Does this mean we will see bear markets/crash like in 1987? No.
But it means we could be in for a larger correction/down trend. Possibly down to around 3.700-3.650 i.e. a correction of approx. 15% from currently levels. Whether it will be swift or a slow bear market is impossible to predict. However, October is called the Jinx month for a reason, it is historically the month with the most market crashes/major corrections. But let’s see. Keep your stops close.
For this bearish scenario to be demolished S&P500 needs to take out previous (September) high.