25 years to the day of the great crash of 87 – black monday.

It is 25 years to the day since the 1987 Crash (how time flies eh?!) and so I thought it might be a good exercise to look at the chart structures leading upto the crash to see if there are any amber signs for us at this point, given how close the US is to its record highs.

One thing that many technical analysts like to do is to note the similarity of past price patterns to current price patterns, implying that the current pattern will resolve similarly to the historical example. In 1987 we have an example of how dangerous such assumptions can be.

On the chart below I have circled two price patterns that are remarkably similar. Each has a double top, then a double bottom, then a rally out of the double bottom, which fails, then a pullback to the support level. At that point what follows is radically different. In example #1 prices rally to new, all-time highs. In example #2 prices dive into one of the worst crashes in history. Lesson: Just because history rhymes doesn’t mean that the ending will be the same.

Next, one might ask if there were any technical warnings? For the answer, let’s look at the charts of the Intermediate-Term Breadth and Volume Momentum Oscillators (ITBM and ITVM). On the price line there is a top in August 1987 that is higher than the previous top in June. Corresponding tops on the ITBM and ITVM show a negative divergence, a bearish indication.

A more serious negative signal occurs at the final top in October before the crash, when the ITBM and ITVM both top below the zero line (see arrows).

To be fair, in hindsight the signs are always obvious, and there is a lot of ambiguity in real time. Nevertheless, negative indicator signs viewed in the context of the final breakdown of price below support just before the crash is pretty strong evidence, and there was adequate warning to take action.