The market also leads a recovery. In a recession, the market will develop strong trending behavior many months prior to the official confirmation of the end of a recession. This recovery provides trend trading opportunities.
In a depression the market will develop a long-term consolidation pattern. This is an investment period that lays the foundations for generational fortunes. Trend-trading opportunities do not develop for several years. This consolidation and accumulation phase concentrates on creating income flow from dividends. The fundamental end of a depression is not recognized until many months after the market has already reacted.
Right now, market is hovering near significant support levels. The closest of these we call recession support targets. The lowest of these we call depression targets. Many analysts have compared the current market situation to the market collapse in 1929. This week we look at charts from the 1929 period. In particular we look at the similarity of behavior.
The above chart is the weekly Dow for 1929 to 1930. The significant features are these:
- The rapid fall is followed by a rebound and rebound failure.
- The primary rebound failure occurs rapidly with another market collapse.
- The pile driver low is retested within 12 months
- Support, defined by the pile driver low, is not successful
The pink circle shows the comparable position of today’s market. This is a period of high volatility, but volatility lessens and the market moves into a more clearly defined trending behavior. This pattern of behavior suggests that a rebound from the current support levels may persist for around 20 weeks.
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The important feature is the rapid failure of the trend line followed by a rapid failure of the pile driver low support-level. The failure of pile driver support brings the really bad news. This failure is acute because the pile driver low support does not equal any previous historical support level.
The low of the market develops in 1932, about three years after the 1929 crash. The key trigger is the failure of support set by the pile driver low. The disaster is that it takes 25 years for the market to exceed the high of 380 set in July 1929. This is why the Depression is referred to as a generational event. The current situation has the potential to have the same generational impact.