I opened my first stock trading account shortly after I landed my first full-time job in 1987 - the same year as the great stock market crash - also known as Horrible Monday. (I renamed Black Monday in keeping with the times.) I dropped out of university to "find myself." It seemed so easy working at an office-supplies retailer: putting supplies in the stockroom; filling the store shelves with merchandise; and handling the cash register. It all made sense, too. I didn't know what I would do with a degree in English or literature. I had dropped out of both these programs.
Investing also made sense. I bought shares in companies to earn a return. Nobody mentioned anything to me about a stock market crash. But anyways a big one was coming. I guess with the elevated hormonal levels still lingering in my veins from my teenage years, I can still remember all the details today.
I consider it fairly disturbing that nearly 33 years later, nobody has come up with an explanation how or why the crash happened. I just know that it had the spill-over effect of causing me to return to university - to do a degree in a completely different area - in environmental studies. My current theory is that stock-market corrections are a normal occurrence meant to facilitate realignment as economies enter different regimes. There is a thermodynamic equivalent found in relation to natural ecosystems. Some regimes off the top of my head are as follows: automobile; automobile-integration; robotics; robotics-integration; computers; computer-integration (that we currently occupy).
In all likelihood, my drive to "save the world" extended from that difficult experience of losing such a large chunk of my savings in the stock market. It is simply how I responded. Calamity struck. Something is wrong. Save world. The crash of 1987 created me - in a sense. It brought about my psychological baseline over which everything else has since been constructed.
Over the last few blogs, I introduced my skipjack trading methodology. The metrics needed to support skipjack trading occupy a theater spanning three days - four days if I include an instrument called a tracer. By this I mean that the variables are extracted from three days of trading. The tracer on the hand predicts a variable found on the fourth day. Skipjack trading uses an action and effect line. The tracer has about a 0.7 correlation to the next-day action - to be explained in greater details later in the blog. I realize all of this is unfamiliar given the lack of documentation. But I wanted to show readers how the metrics behave using the Dow Jones Industrial Average both before and after the crash of 1987 presented below. I call the metrics the Levi-Tate (levitate) Group of Technical Metrics. Ironically, I have been using these metrics primarily to study stock-market corrections.
The "crash" is just to the right-of-middle, I hope readers can see, just around the 181st trading day. These metrics show that for the most part, they all avoid the zero line; and extremely rarely do they all approach and subsequently fall below the zero line. So it is a special day indeed when this happens. Because zero-avoidance is so prevalent, the next chart at 2 days before the crash remains quite threatening. In my last blog, I introduced the Destroying Angel formation. Below, I present the Waterfall and Rock formation. Is it a great time to invest - during something I call a waterfall-and-rock formation? Of course it is not! There is a waterfall. There is a high likelihood of whipsaw from the rock. Also, hello, there is not a single healthy skipjack anywhere nearby.
Below I provide the pricing chart for the same period as the preceding. I know some people are thinking, hey, clearly this is not a good time buy. Well, no, this is not clear at all. Some would call this a great buying opportunity. After all, nobody has quite explained why it wouldn't be - why pricing support should necessarily collapse. I excluded the action line and the tracer mostly because I think most readers wouldn't be able to tolerate the amount of information being provided all at the same time; but for the most part, both of these lines provide advanced warning. However, neither of them are strongly correlated to the price. The slower lines - the lines of effect - provide a more reliable indication of price but only within certain formations usually involving the action line.
It is quite mysterious how the tracer is well-correlated to the next-day action most of the time. I already mentioned that the action is not a good indication of price. But during certain formations such as the skipjack, action strongly influences effect, which can lead to an effect-price correlation near 1. During a good skipjack, the effect line is rising upward from tail-fin to head - meaning that price should likewise increase. Well, this is according to the trading model, anyways.
Since there are so many moving parts, I think many people would consider a buy-and-hold strategy much more straightforward. I can quite honestly say, during a boom period, it would probably be inefficient jumping in and out of the market; and there is a greater risk of missing out on unpredictable leaps in price. It is certainly not my place to convert people. (Literally, I am not licenced to give financial advice.) But I did want to show how the Levi-Tate group of technical metrics appear to have the ability to anticipate corrections.