I've touted on numerous occasions about the similarities I see between now and 1938. However, my main argument to support the 1938 likeness (up until now) had been with respect to the turning dates, and not necessarily the price structure. In retrospect, that was a flaw in my analysis, but upon a fresh review of the 1938 fractal, the likeness now takes on a whole new meaning. Let me show you what I mean.
Consider the following charts of the Dow Jones Industrial Average:
Dow Jones Industrial Average - 1938
Dow Jones Industrial Average - Present
where,
- Section A = Price falls precipitously and marks the end of panic sell off
- Section B = Sharp and powerful 'V'-shaped price recovery, catching most market participants off guard.
- Section C = Price consolidation that digests Section B's rally (fake out included!)
- Section D = Sharp 'day-after-day' rally subsequent to fake out
- Section E = Consolidation with downward bias
- Section F = Final sharp rally that ends bull run.
Even minute details are visible such as the 'fake out' that occurred in Section C and the 'day-after-day' rally that occurred in Section D of both years (does "failed head & shoulders" ring a bell?). In fact, the correlation between now and 1938 is an astounding 0.765 which indicates moderate correlation.
Present vs 1938
Tell me this isn't very interesting! In case you're wondering, the correlation when matching the bottoms in March 1938 and 2009 is a respectable 0.722.
Present vs 1938
Where are we now you may ask? Well, despite the markets being very strong, I am still of the premise that rallies should be shorted on an intermediate basis, although how high we get between now and 9/18/09 is tough to say. My forecast calls for a lot of chop over this period which is consistent with what occurred in 1938.
