Were you active in the stock market in 1987? Perhaps you were an active investor at the time, or an investment adviser, broker, or market maker. You may remember that stocks had been on a long rise since 1984, with a series of flat prices during the last half of 1985 followed by a fairly steep rise in 1987, culminating in a spike on August 25. From then until early October, prices were essentially down, then rallied for eight days to a higher close on a white candle bar on October 1, signifying an “up” day. The indicators we have at our disposal today, when applied to the price condition at the time, show that its readings were nearing a peak; and that they actually peaked on October 2 (a Friday) and October 5 (the following Monday).
That Friday, October 2, a special type of candlestick reversal pattern emerged on that day’s chart: a “Doji,” in which the opening price and closing price were nearly equal. (The word “Doji” is both singular and plural.) It was not generally known in the “West” at the time, but it was well understood in Japanese trading lore that when a Doji appears at the high end of a price rise, it constitutes a warning of a potential trend reversal.
The next trading day, Monday, October 5, another Doji appeared, the opening price and closing price for the day were almost the same again. The uniqueness of these two Doji lies in this: between the two, one compared to the other, the opening and closing prices were almost the same.
Although not understood in the “West” in those days, this double Doji pattern (the two days taken together) was massively bearish. It was actually a form of triple Doji, to which I have assigned the name “Unique Triple Doji”.
The day after the appearance of the Triple Doji, the Dow Industrials fell 92 points. (To keep things in perspective, keep in mind that the Dow Jones at the time was around 2600.) Over the next eight days, ending on Friday, October 16, the Dow fell another 302 points. The traders could have exited the market at any time during those eight days.
The next trading day, Monday, October 19, became known as “Black Monday.” Prices fell at the open; and when the carnage for the day was complete, prices closed at 1738.70, for a total drop of 901.5 points, or 34%, from the close on October 5, the day of the second Doji.
People who were active in the market in those days and who are still with us now remember that Black Monday “came out of nowhere,” or “came out of nowhere.” That was obviously not the case at all – there were nine trading days after the Unique Triple Doji warning appeared to exit the market before Black Monday. The mystery is why someone would have waited so long to get out.
Observers tried to find an external “reason” for the crash. One has never been found, neither then nor after all this time since October 1987.
Now let’s take a look at the market events in April 2010 to see if we can find any parallels to the events of October 1987.
The market had been in a long rally since early March 2009, in what became known as the 2009 Great Rally, which was a bullish correction in an underlying bear market that began in October 2007. The rally came with some zigzags. and zags until, on April 26, 2010, prices topped and retraced precisely at the 61.8% retracement level of their decline since October 2007, which was a logical “Fibonacci” point at which one could wait for a top and a reversal. (The pattern for the day was a Doji). The next day, April 27, a tall black candlestick (signifying a bearish day) appeared on the Dow Jones daily chart, “bearishly engulfing” the “real bodies” of the price bars for the eleven trading days that followed. they preceded it. This was a hugely bearish trend reversal pattern. I have never seen a “bearish engulfing” pattern before that engulfed as many as eleven Royal Bodies. It was a powerful pattern that warned of the possibility of a dramatic fall in prices very soon, and that its effects would be long lasting.
Two more bearish engulfing patterns (each with just two price bars, one white and one black) emerged in quick succession. Then on May 6, just the seventh trading day after the high black candlestick appeared, the Dow opened roughly 5 points below the previous day’s close. The 5-minute chart for that day shows that from mid-morning onwards, prices remained generally level until around 1:30 pm, when they began to slowly fall. The pace picked up a bit until around 2:00 p.m., at which point it picked up, seemingly exponentially for almost every five-minute period, until a final dip that bottomed out around 2:30, and then , in a matter of minutes, reversed the field and closed. that 5-minute period at roughly the price it had started at. At the Low (of that terrifying 5-minute period and of the day) prices had plunged 994 points, or 9.15%.
In the graphic, the depiction of the event is reminiscent of a roller coaster car, having climbed the first incline to the top of the first big drop, going over the top, slowly turning back down, then rapidly accelerating into a whoop. . to the bottom.
I cannot find any candlestick pattern that could explain the drop. I can only point to the massive bearish engulfing pattern in April, which was followed almost immediately by two additional bearish two-bar engulfing patterns, as accurate predictors of the decline.
To date, researchers are still looking for an “external cause” for the decline. They haven’t found one yet. If the 1987 Crash case to date is any guide, they may never find one.
