The Crash of 1987 and Technical Analysis

Any great investor would want to avoid a crash like that of 1987, and yet a significant amount of them could not do it, although some of them saw the signals and went to cash.

The truth is that most bear markets are quite similar, and all of them usually offer us good signals to get out of them. 1987 was not an exception.

1987 big crash

Before that dark Monday on the 19 of October 1987, the market gave us a classic signal of a previous monthly bottom being violated. In that case on September 21st, when the market had fallen a 10% from the top.

In a classic bull market, the next reaction would take the market higher than the previous top. Although, in that occasion, the market went up a few percentage points to go south again to test those September levels, three weeks later.

A technical analyst should have no trouble seeing it and would have gotten out immediately, and perhaps would have considered going short.

That signal of 1987 would have probably been accomplished as well with a 100 or 150 moving average.

Also, we could have been out of the market using orthodox Dow Theory, the Friday before the Black Monday at latest.

1987 Crash Technical analysis

Those who are invested for the long term (buy and hold) should never get out of the markets. However, some of those surely did in 1987 in the middle of a crash that seemed to be the end of the world when the stock market was falling 20%.

A long-term investor should always trust his philosophy of investing and never sell under any panic. He should keep his investment till the end.

On that occasion, as usual, the market recovered a few years later.

If some day the world truly ends, that long term investors should not worry either because there would not be a market to worry about.

That is why when you follow a strategy like that you must never sell, because if you let your emotions rule you will probably sell at the worst moment (1931 or October 1987).

As we can see in the chart, the September bottom was very clear, and a technical analyst would not have had the slightest doubt to get out.

It is possible that when the market would test those lows of September nothing would have happened, and the market went up again. But quite often, when we see that pattern a bear market follows, sometimes a 25% one (2011), and sometimes a 90 one (1929).

Technical Analysis bear markets

We rather are tranquil than being long in stocks in the middle of a vicious bear market.

Even most disciplined investors suffered a lot in the worst moments of the 1929 bear market (early thirties).

It is true that technical analysts would miss part of the bull market because of false signals like that of 1987, but they rather pay that price to be able to sleep fine.

To see a signal like that we do not need any indicator, not stochastic or strange oscillators of any type. Price is more than a trader needs.

 

P.S. This is a personal translation from my spanish blog www.brokerparacompraracciones.com.

Thanks for reading and sharing.

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