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Chart In Focus

1929 Analog

Chart In Focus
November 27, 2013

I recently became aware of a fascinating price pattern analog uncovered by legendary technical analyst Tom DeMark.  He figured out that the recent pattern of stock price movements looks a whole lot like the lead-up to the 1929 top. 

A lead-up to just any old top is one thing, but the 1929 top was followed by a fairly memorable decline, which makes it all the more worthy of our attention.  There is no guarantee that the current market will continue to follow this prior pattern, but if it does continue, well then that's something worth paying attention to.  I plan to do so in the pages of our twice monthly McClellan Market Report and its companion Daily Edition

The operating theory behind price pattern analogs is that similar market conditions can produce similar patterns.  The difficulty that most people have is in equating the market conditions from one period to another.  In 1928, for example, the Fed was raising the Discount Rate up as high as 5.0%.  The stock bubble continued along merrily in spite of the rising rates, as the fad of chasing the latest hot stock captured the public's imagination.  That Fed tightening of the late 1920s is obviously not what is happening now, but yet the pattern is nearly the same.  This point suggests that it is not the "usual suspects" that are the driving force behind creating price structures.  Something else must be the causative agent. 

For those who wish to play along at home, either for this price pattern analog or any other, the task is much easier in the current age than it has ever been before.  A simple spreadsheet program is all that is needed to create a comparison chart, and to select ranges of data to display.  And you can get data on stock market averages from the St. Louis Federal Reserve, going back several years. 

One big fat problem standing in the way of such analysis is that not all periods are created equal.  Back in the 1920s, and indeed all the way up until the early 1950s, the NYSE used to trade 6 days a week.  So the year 1928, for example, had 295 trading days in it.  The year 2012, by contrast, had only 252 trading days.  Part of the difference is the loss of the Saturday trading days, and part of it is a difference in holiday schedules.  Election days, Columbus Day, and Washington's and Lincoln's birthdays used to be trading holidays.  Now we have a different schedule of holidays, and never trade on Saturdays.

This issue of unequal calendars becomes important if one uses a spreadsheet for such analysis, as I do.  In a spreadsheet, each trading day takes up one row, and constructing a chart involves equal numbers or rows from each of the columns of data being featured in the chart.  So, for example, if you want to compare a year with 295 trading days to another with 252, the two plots won't show the same rate of change of time over the course of the chart.  One plot will be longer than the other, even though each shows a year's worth of data. 

There are several ways that one can deal with such problems.  Sophisticated charting software packages can stretch or compress data to fit into a given calendar period, using a variety of mathematical techniques.  A more crude and Procrustean way is to just adjust the data to fit the ideal calendar you want to use. 

I did that type of adjustment for this comparison by just deleting all values for Saturdays from the 1920s data, and then making other slight adjustments as needed for the uneven holiday schedule.  The presumption involved is that the timeline which matters is not the trading day schedule, but rather the real yearly calendar.  Seeing the way that the patterns seem to align well in the chart indicates that this is the right sort of presumption, at least as far as how repeating price patterns form on the chart. 

Another way to do it is to convert all years to a 365-day calendar, repeating the Friday data values to fill in Saturdays and Sundays.  Both methods involve necessary compromises.  There is no single correct answer to the question of what is the "right" way to adjust the data. 

One very interesting implication of this chart pattern analog is that it says that the equivalent of the Sep. 3, 1929 top is ideally due Jan. 14, 2014.  No one should take that Jan. 14 date literally, since I could have slid the pattern alignment fore or aft a few days and it would still look good.  And the market tends to only approximate the 1929 pattern rather than repeating it precisely.  In other words, expectations of precision are just not warranted. 

The approximate Jan. 14 date is all the more interesting in light of a couple of independent pieces of analysis by some friends of mine.  Stan Harley, a former Navy F-14 pilot and author of the Harley Market Letter, has figured on Jan. 10 as an important top date candidate based on his Fibonacci cycle expansion work. 

And another friend, Ed Carlson, is the current living expert on the works of the late George Lindsay.  Ed also targets the first half of January as the later of two likely ultimate top dates for this uptrend.  Lindsay's techniques involve counting specific numbers of days forward from important market dates, and the trick to counting to a bull market high is being able to identify the low of what Lindsay called a "basic advance", which is sometimes not the lowest low.  Lindsay unlocked the secrets of unusual techniques for finding those elusive important days to count from, which Ed explains in his book on Lindsay's work.  If Lindsay's techniques had been easy to understand, everyone could have figured them out.  It is not easy, but it is fascinating work. 

So here we have 3 wholly unrelated technical disciplines altogether pointing toward a big market top in mid-January.  That's just about the time when the current congressional agreement on the debt ceiling comes up again for discussion, which ought to be a reasonable cause for investors to take pause in their enthusiasm.  And with the new year starting for health insurance policies amid a growing chorus of complaints about the implementation of the Affordable Care Act, there will be plenty of discontent for investors to focus on come mid-January. 

Until then, the Fed's beneficence remains the dominant factor.  The Fed is not likely to yank away the punchbowl at its Dec. 17-18, 2013 meeting, just a week before Christmas, but the Jan. 28-29, 2014 meeting is a greater possibility for finding out that the markets may have to start to quit the QE addiction.  And the FOMC's March 18-19 meeting fits right about where the Black Thursday crash of 1929 fits into this analog.

Tom McClellan
Editor, The McClellan Market Report

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