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Top technician: Yes, 2013 does look like 1987

Monday, 12 Aug 2013 | 1:47 PM ET
Is another crash coming?
Friday, 9 Aug 2013 | 5:46 PM ET
The market is showing signs of weakness and similarities to steep market tumbles. CNBC's Melissa Lee and the "Options Action" traders discuss how to protect yourself from Dr. Doom.

Marc Faber frightened the market with his call that 2013 is looking a lot like 1987. But while the Gloom, Boom & Doom Report publisher has been quite bearish for some time, one top technician now says that the charts back up the unsettling comparison Faber made on Thursday.

(Read more: Marc Faber: Look out! A 1987-style crash is coming)

Carter Worth of Oppenheimer starts out with a simple premise: "Tops have a look and feel over and over and over."

Citing the same warning sign Faber pointed to, Worth said on Friday's "Options Action" that a top tends to come "as breadth starts to wane—and then the trouble ensues." With that in mind, he took to the charts to compare the current market action to the charts leading up to historical tops in the market.

Worth's first comparison is to the two years leading up to May 2011, when the market dropped on the S&P downgrade of the U.S. credit rating.

Worth notes the similarity between that chart and today's, noting that in 2011: "Basically we plunged, from May to August, about 20 percent." He added: "Now that's a fairly benign thing—20 percent—but it's the shape and look of the ascent that precedes the drop that's important."

Building on his case, Worth noted a similarity between August 2011 to August 2013, and the two years leading up to the decline of 1968.

"In 1968, we had a very similar two-year trajectory, just like the one we're in now, and then the trouble started," Worth said, presenting another chart that looks strikingly similar to our present situation. "In this case, it was in December of 1968, and over the next 18 months, we dropped 40 percent," he said.

Worth then looked at the chart of the two years leading up to the infamous crash of 1987.


Of all the periods that Worth looked at, 1987 is "the one that's the most correlated" with the current market—"it's running at a 96 percent correlation," he said.

Given that in 1987, the S&P fell some 40 percent in three months, Worth finds this correlation very troubling.

"Does it have to play out that way? No," he said. "But it really does speak to: What is one playing for by staying long? Is it asymmetrical risk-reward?"

In Worth's view, the risk-reward is indeed highly skewed. "Upside is limited, and by staying in, you embrace or prospectively take the punishment that is coming," he concluded.

(Read more: Siegel: Keep buying—you 'can't lose')

Dan Nathan of RiskReversal.com is of the same mind. "You probably have a few percent to the upside, but you could potentially have a really sharp down-10-percent move," Nathan said.

Of course, given what the market did in 1987 after topping out, perhaps a decline of just 10 percent would leave some investors thankful.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @C NBCAlex.

Follow the show on Twitter: @CNBCOptions.

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  • Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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