The October 2008 crash really began in earnest 09/22. The previous week had brought with it the announcement of the Lehman bankruptcy, resolving in a bullish doji star at SPX 1225-1260 support. Talk about a Trojan horse. Once 9:30 a.m. 09/26 rolled around, equity indices opened where they left off at 1255 and saw virtually no reprieve until 10/10/08, a mere 3 weeks and a staggering 356 points further down. Open to close on SPY, 124.45 to 88.58.
This began a period of more than four months of consolidation: currently the S&P has undergone two. That period is an excellent example to study in comparison with the S&P’s current malaise. Not because of similarities in the macro environment. Not because of bank balance sheets, the advent of massive government intervention programs, technical cycles or historic antecedents.
I’m not suggesting this is “another 2008″; or 1937, for that matter; but here are a few observations I find valuable looking back that correlate well to August-September 2011.
1) Consolidation periods can be marked by extreme volatility. Not all sideways action is stock pong on the 13″ B&W tv circa 1979.
This sounds like something of an oxymoron – consolidation/volatility – but you’re looking at it! For example, during the weeks of 10/13/08 and 10/20/08 SPY printed a high of 104.98 and a low of 83.56. That’s a range of over 200 points on the S&P in 10 trading days; and it isn’t as though that was all in one direction! Trading volatile areas of congestion can be devastating, especially if “trading” entails over-thinking the market/anticipating a breakout that does not emerge, resulting in shorting the bottom or buying the top.
Like an opportunistic infection, I can’t think of a time when cognitive biases latent or overt ravage traders; and judging by the bottom-picking prattle, this time is different. In contrast, as Jesse Livermore is quoted, “It never was my thinking that made the big money for me. It always was my sitting.”
2a) What begins as pure panic (or euphoria) subsides only gradually – but it does subside, and with that the tenor of the market changes. Compare the range from October with the weeks of 02/02/09 and 02/09/09, with a range 80.63 – 86.89. That’s still 60 points, but the consolidation had tightened considerably.
2b) Time doesn’t always heal immediately; or, just because something looks bad doesn’t mean it can’t get worse before it gets better! Pure panic subsided gradually, yes: only to bring a steep decline in Feb-Mar ’09 before full bearish capitulation occurred. Consolidation periods bringing out contrarians and their vague, mostly untradeable ideas about catching bottoms and bucking the herd mentality. Very, very few people can do this well. Most did it horribly wrong because they thought “blood in the streets” meant a bottom as they built heavy long positions at S&P 800 (SPY 80). That support level held sturdily; until it didn’t.
3) False breakouts and traps can and do occur – often. The week of 11/17 featured a break well below 80 to a intraweek low of 73.95. Though the week closed at 79.11 (which was a closing low below the all important 80 level): the next week’s close posted at 89.62. These are vagaries of a volatile market.
4) Disequilibrium eventually resolves toward relative equilibrium, before conditions spin out of control yet again. The apparent chaos of 2008 – and the many WTF moments shared by fundamental and technical market observers alike – resolved into a relatively uniform descending triangle. There was a breakout bringing vindication to the bears (well, for a month), the market dropped toward (but didn’t quite achieve) the triangle’s minimum objective; and the rest is history.
The current consolidation has morphed and morphed again. To those who are frustrated and demoralized by this: adapt or die; or step away! The S&P does appear to be literally rolling over but charts are never more dynamic than in an environment like this.
