To understand the current charts better, I have decided to look back across the history of market crashes and study how the S&P500 index behaves. More specifically, I am looking at bear markets where the global economy entered into a recession. So I am not looking at those baby bears where it drops 20% and climbs back up after a few weeks. These are big bears.
1. 1973 – 1974 Stock Market Crash
From 1973 to 1974, the stock market crash due to the collapse of the Bretton Woods system and the 1973 oil crisis. This is the period where the monetary system underwent a paradigm shift.
The US dollar, which used to be pegged to the physical gold, was cut off by Richard Nixon in 1971. It is from then on when the US dollar became fiat currencies that were backed by nothing. The printing machines begin to go “Brrrrr” because of the Vietnam war and the dollar depreciates.
This caused a problem to oil producers since oil prices are denominated in dollars. The lower the dollar, the lower the government revenue for OPEC countries since they are heavily dependent on oil exports. This was before the US shale oil revolution. Now? The US is the largest oil producer in the world.
Anyways, back then the US has reached its peak production of oil, but the domestic consumption of oil continues to rise. Hence, they have to import oil from the middle east. Now OPEC has leverage on the US.
The Arab members of OPEC were obviously pissed because their income dropped drastically. To make things worse, the US provided military aid for Israel when Egypt and Syria attack Israel. Hence, they retaliate by placing an oil embargo to stop oil exports to the US and its allies, thus causing oil prices to spike.
Due to all these FUD, it triggered a bear market which lasted for about 21 months. The market plunges 48% from its peak and it moves in 5 waves count with 2 sucker rally. One lasted for 16 weeks while the other lasted for 5 weeks. Both rallies were about 10% up.
2. 2000 Dotcom Bubble
The dotcom bubble requires no introduction. It is the mania phase where everyone is plunging their money into internet-related stocks. The NASDAQ rose 400% and P/E ratio spikes to 200. Then, reality sets in and pops the hopium.
During this period of time, the SPX sorts of move in a similar “5-wave” count with 1 final dead cat bounce before hitting the bottom. There are a total of 3 sucker rally that lasts between 1 month and 5 months. The gains were about 20%+ in each retracement.
Note that the wave counts I am referring to are not Eliott waves. These are just arrows that I drew myself to show how the market makes lower highs and lower lows.
3. 2007-08 Financial Crisis
This is the last crisis we had. The housing bubble. Banks started to lend everybody money and use the properties as collaterals. Since the value of properties doesn’t plunge in a volatile manner, everyone thinks it is safe. Of course, they are wrong.
Then they started to package it up into collateral debt obligations (CDO) for sale to institutional investors. Credit rating agencies give an investment grade of AAA. Borrowers default on payments, houses go into foreclosure. Prices of properties fell, Lehman Brother collapse, AIG got bailed out.
And the printing machine goes “Brrrrr” again. (QE1, QE2 & QE3)
This time around, the bear market lasted for about 1.5 years. Similarly, there are also about 5 wave counts, followed by one final rally before plunging down to the bottom. Between this period, 3 sucker rallies happened and they lasted for a couple of weeks.
4. 2020 Coronavirus Crisis
How about this? The previous 3 major crashes all had a recession and all have at least 5 wave counts. If 2020 is a recession year, do you think that it would only have ONE wave count and the stock market would just do a u-turn rebound shooting back right through the roof?
From the looks of it, I really don’t think so. I think it is just 1 of the sucker rallies in a bear trend. Historically, there is about 2 to 3 of them. So right now the rally we are seeing is very likely going to be it.
The only difference between history and today is infinity QE. In the past, they don’t go “Brrrrrr” as much. In 2020, every few weeks you see trillions in stimulus coming in. They are printing a lot more and a lot faster. It is scary. I have no idea about the extent of money printing on the stock market, but it is there.
Another difference is probably the rise of algorithmic-trading and speed of information. That’s why the fall & rebound is much sharper and faster. It could be accelerated by trading bots.
This time is different is probably the 2 differences above. But, I still believe that a bear market in a recession year will definitely have this sort of 1-2-3-4-5 wave counts.
Where Are We Now?
I have plotted out the current coronavirus crisis and compared it against the past major recessions. This is how it looks like. If history were to repeat itself or at least rhyme, there is never a time a V-shaped rebound happens. Except for the Black Monday Crash. But that is because it is caused by computer program-driven trading models. (That’s why there are circuit breakers now) Hence, I excluded it out.
Furthermore, now everyone is predicting the economical impact is worst than the 2007-08 recession and the Great Depression. It could be worse is because this is both a supply and demand issue.
In the past, it is just a supply issue. If financial institutions don’t have enough liquidity, the fed can just pump money supply in. That is what happens to the repo operations in 2020. That is easy to solve.
But a demand issue is really tough. How can you force consumer spending when everyone is quarantined? There would be a supply glut and businesses are losing cash flow every day. The global economy has basically come to a halt. The longer this delays, the more severe the economic impact.
Technical Analysis of SPXUSD
As of today, the weekly charts of the SPX is showing a Doji. We are also at the 50 Fib retracement point. The market has rallied for about three weeks now coming to the fourth. On the four hour time-frame, an ascending wedge pattern is in the formation. The recent higher highs are also getting weaker as seen by the RSI divergence. We failed to make a higher high in the past few days. The bulls might be tired.
The first-quarter earnings report and economic data are rolling out over the next few days and weeks. Banks look battered and credit losses are expected to spike. Retail sales are down -8.7% and it is much worse than the 2008-09 and dotcom bubble period. Unemployment claims are going to be out again today. The previous 6.6m is also much worse than the 08 crisis and the dotcom bubble. So when people say it is much worse than the previous recessions, the economic data justifies it.
There are two ways the chart can go from here. The bearish scenario is that 2855 is the peak of the sucker rally and the market starts its 2nd leg down to retest the bottom. The bullish scenario would be it reaches the bottom of the wedge, bounces up and breaks above the resistance zone, then move towards the 61.8 Fib level.
Personally, I think the tides are turning now. All the stimulus QE news has already been deployed. The market has rallied over it and now the bad news is coming out. Nevertheless, anything can happen. We are in volatile times now. So all the best to your trades.