For Stocks, is it 1997 All Over Again?

StocksLast Wednesday, I wrote about how stock-watchers should probably wait a few more days before trying to figure out whether the U.S. market was more likely to bounce back towards new all-time highs, or whether the sharp sell-off is the start of a major correction which could get deeper or even lead to a bear market. We have a couple more days of data to look at now, which points towards some interesting initial conclusions.

In a little more than one week, we saw the major stock index fall from an all-time high by almost 10%, if we look at data from the New York hours only. Monday saw the climax of the downwards move, and the price advanced strongly during Tuesday’s session, recovering considerably. Yesterday saw the market close down a little, on declining volatility, and at the time of writing the market is selling off a little in the first minutes following the official open. There are two things technical analysts will note – the declining volatility, and the fact that the recovery has not yet reached half of the amount of the fall. The declining volatility suggests that the price is beginning to consolidate and stabilize, yet the fact that the recovery has not recouped 50% of the losses suggest it is still in doubt.

Looking at historical precedents, there is only one case in nearly half a century of data which looks very similar to today’s market – October 1997, when a mature bull market fell from an all-time high by more than 13% over a couple of weeks, climaxing in a very strong down day, but bouncing back sharply the following day with the market clawing back more than half of the total drop. The bull market resumed after a week or two of consolidation, rising by well over 50% from the recovery day’s close before it ended. In that case, buying the dip in October 1997 worked out very well:


The current picture is similar, but the fall was less severe, and the recovery less rapid, although the candlestick pattern looks broadly similar over the last four days:


This suggests that it is not time to consider buying just yet, at least not until we get a daily close above the 50% retracement level at 2733. Yet there is an excellent chance we saw a long-term market low on Tuesday.

Adam is a Forex trader who has worked within financial markets for over 12 years, including 6 years with Merrill Lynch. He is certified in Fund Management and Investment Management by the U.K. Chartered Institute for Securities & Investment. Learn more from Adam in his free lessons at FX Academy.