A Candlestick Comparison Of The Crash Of 1987 And The Flash Crash Of 2010
Were you active in the stock market in 1987? Perhaps you were an active investor at that time, or an investment adviser, a broker, or a market maker.
You may recall that stocks had been in a long rise since 1984, with a spate of flat prices during the last half of 1985 followed by a rather sharp rise in 1987, culminating in a peak on August 25.
From then until the beginning of October, prices were essentially Down, then rising for eight days to a higher Close in a white Candlestick bar on October 1, signifying an "Up" day.
Indicators which we have at our disposal today, when applied to the price condition at that time, show that their readings were coming to a peak; and that in fact they peaked on October 2 (a Friday) and on October 5 (the following Monday).
On that Friday, October 2, a special kind of Candlestick reversal pattern emerged in the chart for that day - a "Doji," in which the opening price and the closing price were nearly the same.
(The word "Doji" is both singular and plural).
It was not generally known in "The West" at that time, but in Japanese trading lore it was well-understood that when a Doji appears at the top end of a price rise it constitutes a warning of a possible reversal of trend.
On the next trading day, Monday October 5, another Doji appeared, the opening price and the closing price of the day again being nearly the same.
The uniqueness of these two Doji lies in this: as between the two of them, one compared to the other, the opening prices and the closing prices were nearly the same.
While it was not comprehended in "The West" in those days, this double-Doji pattern (the two days considered together) was enormously bearish.
Actually, it was a form of triple Doji, to which I have assigned the name "Unique Triple Doji.
" On the day after the appearance of the Triple Doji, the Dow Industrials fell 92 points.
(To keep things in perspective, bear in mind that the Dow at that time was at about 2600).
During the following eight days, ending on Friday October 16, the Dow fell another 302 points.
Traders could have exited the market at any time during those eight days.
The next trading day, Monday October 19, came to be known as "Black Monday.
" Prices gapped down on opening; and when the day's carnage was complete, prices closed at 1738.
70, for a total decline 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 recall that Black Monday "came out of the blue," or that it "came out of nowhere.
" It is obvious that such was not the case at all: there were nine trading days after the emergence of the Unique Triple Doji's warning within which to exit the market prior to Black Monday.
The mystery is why anyone would have waited so long to get out.
Observers tried to find an external "reason" for the fall.
One has never been found, not then and not even after all this time has elapsed since October 1987.
Now let us look at the market events in April 2010 to see whether we can find any parallels with the events of October 1987.
The market had been in a long rise since early March 2009, in what came to be known as the Great Rally of 2009, which was an upside correction in an underlying bear market that began in October 2007.
The rise had proceeded with a few zigs and zags until, on April 26, 2010 prices topped and fell back precisely at the 61.
8% retracement level of their decline from October 2007, which was a logical "Fibonacci" point at which one might expect a top and a reversal.
(The day's pattern was a Doji).
On the next day, April 27, a tall black Candlestick (signifying a Down day) emerged on the Daily chart of the Dow, which "bearishly engulfed" the "Real Bodies" of the price bars of the eleven trading days which preceded it.
This was an enormously bearish trend reversal pattern.
I had never before seen a "bearish engulfing" pattern which engulfed as many as eleven Real Bodies.
It was a powerful pattern which warned of the possibility of a dramatic decline in prices very soon, and that its effects would be long-lasting.
Two more Bearish Engulfing patterns (each of them involving only two price bars, a white and a black) emerged in rapid succession.
Then, on May 6, only the seventh trading day after the emergence of the tall black Candlestick, the Dow opened about 5 points below the previous day's Close.
The 5-minute chart of that day shows that, from mid-morning onward, prices were generally level until about 1:30 PM, when they slowly began to fall off.
The pace accelerated somewhat until about 2 PM, at which time the pace speeded up, seemingly exponentially during nearly every succeeding five-minute period, until a final plunge which hit bottom at about 2:30, and then within minutes had reversed field and closed that 5-minute period at about the price at which it had begun.
At the Low (of that frightening 5-minute period, and of the day) prices had plunged 994 points, or 9.
15%.
On the chart, the depiction of the event is reminiscent of a roller coaster car, having been pulled up the first incline to the top of the first big drop, passing over the crest, slowly turning down, and then quickly accelerating in a screaming rush 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 almost immediately followed by two additional two-bar Bearish Engulfing patterns, as accurate predictors of the falloff.
As of this date, investigators are still searching for an "external cause" of the decline.
They haven't found one yet.
If the case of the Crash of 1987 to date is any guide, they may never find one.
You may recall that stocks had been in a long rise since 1984, with a spate of flat prices during the last half of 1985 followed by a rather sharp rise in 1987, culminating in a peak on August 25.
From then until the beginning of October, prices were essentially Down, then rising for eight days to a higher Close in a white Candlestick bar on October 1, signifying an "Up" day.
Indicators which we have at our disposal today, when applied to the price condition at that time, show that their readings were coming to a peak; and that in fact they peaked on October 2 (a Friday) and on October 5 (the following Monday).
On that Friday, October 2, a special kind of Candlestick reversal pattern emerged in the chart for that day - a "Doji," in which the opening price and the closing price were nearly the same.
(The word "Doji" is both singular and plural).
It was not generally known in "The West" at that time, but in Japanese trading lore it was well-understood that when a Doji appears at the top end of a price rise it constitutes a warning of a possible reversal of trend.
On the next trading day, Monday October 5, another Doji appeared, the opening price and the closing price of the day again being nearly the same.
The uniqueness of these two Doji lies in this: as between the two of them, one compared to the other, the opening prices and the closing prices were nearly the same.
While it was not comprehended in "The West" in those days, this double-Doji pattern (the two days considered together) was enormously bearish.
Actually, it was a form of triple Doji, to which I have assigned the name "Unique Triple Doji.
" On the day after the appearance of the Triple Doji, the Dow Industrials fell 92 points.
(To keep things in perspective, bear in mind that the Dow at that time was at about 2600).
During the following eight days, ending on Friday October 16, the Dow fell another 302 points.
Traders could have exited the market at any time during those eight days.
The next trading day, Monday October 19, came to be known as "Black Monday.
" Prices gapped down on opening; and when the day's carnage was complete, prices closed at 1738.
70, for a total decline 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 recall that Black Monday "came out of the blue," or that it "came out of nowhere.
" It is obvious that such was not the case at all: there were nine trading days after the emergence of the Unique Triple Doji's warning within which to exit the market prior to Black Monday.
The mystery is why anyone would have waited so long to get out.
Observers tried to find an external "reason" for the fall.
One has never been found, not then and not even after all this time has elapsed since October 1987.
Now let us look at the market events in April 2010 to see whether we can find any parallels with the events of October 1987.
The market had been in a long rise since early March 2009, in what came to be known as the Great Rally of 2009, which was an upside correction in an underlying bear market that began in October 2007.
The rise had proceeded with a few zigs and zags until, on April 26, 2010 prices topped and fell back precisely at the 61.
8% retracement level of their decline from October 2007, which was a logical "Fibonacci" point at which one might expect a top and a reversal.
(The day's pattern was a Doji).
On the next day, April 27, a tall black Candlestick (signifying a Down day) emerged on the Daily chart of the Dow, which "bearishly engulfed" the "Real Bodies" of the price bars of the eleven trading days which preceded it.
This was an enormously bearish trend reversal pattern.
I had never before seen a "bearish engulfing" pattern which engulfed as many as eleven Real Bodies.
It was a powerful pattern which warned of the possibility of a dramatic decline in prices very soon, and that its effects would be long-lasting.
Two more Bearish Engulfing patterns (each of them involving only two price bars, a white and a black) emerged in rapid succession.
Then, on May 6, only the seventh trading day after the emergence of the tall black Candlestick, the Dow opened about 5 points below the previous day's Close.
The 5-minute chart of that day shows that, from mid-morning onward, prices were generally level until about 1:30 PM, when they slowly began to fall off.
The pace accelerated somewhat until about 2 PM, at which time the pace speeded up, seemingly exponentially during nearly every succeeding five-minute period, until a final plunge which hit bottom at about 2:30, and then within minutes had reversed field and closed that 5-minute period at about the price at which it had begun.
At the Low (of that frightening 5-minute period, and of the day) prices had plunged 994 points, or 9.
15%.
On the chart, the depiction of the event is reminiscent of a roller coaster car, having been pulled up the first incline to the top of the first big drop, passing over the crest, slowly turning down, and then quickly accelerating in a screaming rush 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 almost immediately followed by two additional two-bar Bearish Engulfing patterns, as accurate predictors of the falloff.
As of this date, investigators are still searching for an "external cause" of the decline.
They haven't found one yet.
If the case of the Crash of 1987 to date is any guide, they may never find one.