Analysis of previous market crashes reveals consistent patterns, which can help us know what might happen in the future.
My previous post presented three historical cycles pointing to Passover 2016 as a major turning point. However, history also tells us what we can expect to see happening after the crash starts. Previous crashes have not happened quickly, but have taken 40 to 44 trading days from the final market top to the first bottom with most of the drop occurring during the final 4 to 8 trading days. If this pattern is repeated and the market top is reached by the end of April, then we can expect to see support levels tested during May and panic selling beginning in about mid-June.
Previous crashes have followed a consistent sequence of eight steps. If the historical pattern is repeated, these steps provide a helpful roadmap for investors.
Note: Market index levels referenced throughout are intraday highs and lows.
Step One – The Final Top
The first step in every crash is finding the final top, the highest point in the market prior to the crash, which becomes the reference point for everything that happens afterwards in terms of both time and changes in the market indices. Last week, a top was established on April 20 at 18,167.63 Dow and 2,111.05 S&P. However, we could still see a new top reached during the next few days.
Step Two – Testing Support
After the top is reached, a testing phase begins in which the market drops down to previous support levels, testing whether or not they can hold. This phase accounts for the longest period of time, but the smallest part of the drop. It typically lasts 34 to 37 trading days from the final market top, but accounts for only 19% to 28% of the total drop. During this phase, support levels are repeatedly tested with about 2 to 4 attempts before breaking through. Each failed attempt is followed by a sharp rebound that peaks within one or two trading days. However, with each attempt investor confidence weakens until the price eventually breaks through.
The testing phase occurs because not everyone perceives it as a crash when it begins. Initially, investors react to bad news by scrambling to protect their wealth and maximize profits, which creates big swings up and down, but it takes time for everyone to become convinced about selling the market. Bullish investors see the low prices as buying signals while those holding short positions see them as opportunities to take profits, so they close their positions, which puts upward pressure on prices.
For example in 2008, the market topped on August 11, but 23 trading days later, on September 12, had only dropped by -3.1%. Then on Monday September 15, Lehman Brothers, which was the fourth largest investment bank in the United States, filed for bankruptcy. With over $600 billion in assets, it was the biggest bankruptcy in history. The news caused the Dow Jones Index to drop 504.48 points (-4.4%) that day, but many investors saw the drop as a buying opportunity, so it bounced back up 141.51 points the next day. Investor confidence was also boosted by a statement released by the Fed on Tuesday, September 16, promising “substantial easing of monetary policy.”
“Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.” (Source: Federalreserve.gov)
Following the news of the Lehman bankruptcy, the markets recovered and finished the week almost flat, down just 33.55 points (-0.3%), which shows many investors were still behaving as if there was no crash.
In the following week of September 22-26 2008, the market dropped by only -2.2%. So ten trading days after the news of the Lehman bankruptcy, investors were still divided about whether or not there would be a crash. If this pattern is repeated this year, we could reach the end of May and still have many skeptics questioning whether or not a crash is really happening. This process takes time!
Even in the third week after the Lehman bankruptcy, September 29-October 3, the markets dropped 777.68 points (-7.0%) on Monday September 29, but then shook it off and recovered most of the loss the next day, up 485.21 points, which again shows investors were still divided about what was happening.
The following provides a brief summary of the testing process in the crashes of 1987, 2001, and 2008.
- 1987 – The market set a final top on August 25 then dropped 9.2% and tested support levels 9 trading days later on September 8. It bounced off support only to return and test it again 10 trading days later on September 22. Again it bounced before dropping back down for the third time 14 trading days later when it finally broke through, igniting 4 trading days of panic selling. In total, the testing period lasted 35 trading days, took 3 attempts to break support, and ultimately accounted for only 19% of the total drop from the final market top on August 25 to the first bottom on October 20, as shown in the chart below.
- 2001 – The market set a final top on July 19 then dropped 4.5% and tested support levels just 3 trading days later on July 24. It bounced off support before returning to test it again 13 trading days later on August 10. Again it bounced before dropping back down for the third time 8 trading days later on August 22. Again it bounced before finally returning and breaking through 5 trading days later on August 29, which ignited 8 trading days of panic selling. In total, the testing period lasted 34 trading days, took 4 attempts to break support, and ultimately accounted for only 23% of the total drop from the final market top on July 19 to the first bottom on September 21, as shown in the chart below.
- 2008 – The market set a final top on August 11 then dropped 8% and tested support levels 27 trading days later on September 18. It bounced off support before returning to test it again 7 trading days later on September 29 and finally broke through, which ignited 7 trading days of panic selling. In total, the testing period lasted 37 trading days, took only 2 attempts to break support, and accounted for only 28% of the total drop from the final market top on August 11 to the first bottom on October 10, as shown in the chart below.
If the historical pattern is repeated, we can expect the drop during the testing phase to be relatively small compared to what comes next.
Step Three – Panic Selling
Step three is a relatively short period of panic selling, typically lasting about 4 to 8 trading days, but accounting for 72% to 82% of the total drop.
- 1987 – Four consecutive trading days of panic selling drove the markets down from 2,528.39 on October 13 to 1616.21 on October 20 declines, which is a 36% drop in 4 days. The panic selling accounted 81% of the total drop from the final market top on August 25 to the first bottom on October 20.
- 2001 – Panic selling was interrupted by the terrorist attacks on September 11, which caused the markets to be closed for 4 days. Even so, the market dropped for 8 consecutive trading days with 6 of them in triple-digit declines. The total drop during the panic was 19.6% starting at 10,066.69 on September 5 and ending at 8,062.34 on September 21. Those 8 trading days accounted 77% of the total drop from the final market top on July 19 to the first bottom on September 21.
- 2008 – Panic selling did not begin until 14 trading days after the Lehman Brothers announcement and continued for 7 consecutive triple-digit drops from Thursday October 2 until Friday, October 10. The market dropped 28% during the 7 days of panic selling, which accounted for 72% of the total drop from the final market top on August 11 to the first bottom on October 10.
If the historical pattern repeats in 2016, we can expect to see 72% to 82% of the total drop occurring during a few days of panic selling in mid-June.
Step Four – The First Bottom:
The fourth step is reaching the first bottom. Previous crashes have demonstrated a consistent pattern of taking 40 to 44 trading days from the final top to the first bottom. During that time, the Dow Index has dropped about 25-41%.
- 1987 – After making the final top on August 25, the first bottom occurred 40 trading days later on October 20. The total drop in the Dow Index was -41%.
- 2001 – After making the final top on July 19, the first bottom occurred 42 trading days later on September 21. The total drop in the Dow Index was -25%.
- 2008 – After making the final top on August 11, the first bottom occurred 44 trading days later on October 10. The total drop in the Dow Index was -34%.
We can follow these patterns to estimate when and where we might find the first bottom in 2016.
Step Five – Bounce After the First Bottom:
The fifth step is a big bounce after the first bottom. By knowing where the bottom is and when it will be reached, traders can make big profits from this bounce because the market moves up sharply for just one or two trading days before leveling off and heading back down to the second bottom. The following statistics from previous crashes show the size of the bounces.
- 1987 Bounce – The Dow hit a low of 1,616.21 on October 20 and rallied back to a high of 2,081.54 just one trading day later on October 21, a gain of 28.8%.
- 2001 Bounce – The Dow hit a low of 8,062.34 on September 21 and rallied back to a high of 8,695.54 just two trading days later on September 25, a gain of 7.9%.
- 2008 Bounce – The Dow hit a low of 7,882.51 on October 10 and rallied back to a high of 9,794.37 just two trading days later on October 14, a gain of 24.3%.
Step Six – The Second Bottom:
The sixth step is the second bottom. Previous crashes have had two bottoms within 55 trading days of the final top. The first bottom occurs 39-44 trading days from the final top followed by the second bottom 6-13 trading days later, as shown below.
- 1987 –The second bottom followed 6 trading days later on October 28, which was 46 trading days from the final top. The second bottom was 9.4% higher than the first bottom.
- 2001 –The second bottom followed 13 trading days later on October 10, which was 55 trading days from the final top. The second bottom was 11.6% higher than the first bottom.
- 2008 –The second bottom followed 11 trading days later on October 27, which was 55 trading days from the final top. The second bottom was 3.3% higher than the first bottom.
So if we reach the final top in April and the historical pattern is repeated, we can expect to see the first bottom in mid-June followed by a second bottom near the end of June or early part of July. We can also expect the first bottom to be lower than the second bottom.
Step Seven – Bounce After Second Bottom:
The historical pattern shows the second bottom typically marks the end of the panic selling and the beginning a big bounce, gaining 5% to 16% in one or two trading days and igniting a new rally.
- 1987 2nd Bounce – Gained 16% in two trading days from 1,767.74 to 2,049.07 on October 30.
- 2001 2nd Bounce – Gained 5% in one trading day from 9,000.14 to 9,432.04 on October 11.
- 2008 2nd Bounce – Gained 15% in just two two trading days from 8,143.59 on October 27 to 9,363.32 on October 29. It then reached a new top of 9,653.95 four trading days later on November 4.
Step Eight – The Final Bottom:
Although the second bottom marks the end of the panic selling, it does not necessarily mark the end of the crash.
- 1929 – Took three years to reach the final bottom during the great depression. In total, the market declined by 90%, making it the largest percentage drop in history.
- 1987 – Took 71 trading days from the final top to the final bottom, which was finally reached on December 4, 26 trading days after the second bottom.
- 2001 – The second bottom was the final bottom, so the crash took a total of 55 trading days from the final top to the final bottom.
- 2008 – Took 55 trading days to reach a second bottom on October 27, but it wasn’t done yet. It took another 19 trading days to reach a third bottom on November 21, and then another 70 trading days to reach the final bottom on March 9 2009, making a total 143 trading days from top to bottom with a total drop of 45%.
Like 1929 and 2008, the crash in 2016 could continue for months or even years before reaching the final bottom due to potential bank failures caused by exposure to trillions of dollars of derivatives and unprecedented debt levels. Our financial system has never been as vulnerable as it is now.
On July 7 2014, God revealed to me in a dream a sudden event is coming, orchestrated by hidden shadow figures, which will cause pandemonium throughout the world. He gave me a total of four warning signs to let me know we were in the season when this event would happen and all four have now been fulfilled.
Last month, I shared how different prophetic warnings came together to reveal Nisan 17 (April 25) as the start date for the next market crash. I shared how Phanuel was shown it would be a day of new beginnings, marking the start of a market crash. I still believe that, but I have not been shown the details on how it all unfolds, which is why I started my sentences in this post by saying “If the historical pattern is repeated…” The sudden event does not have to fit into the historical pattern, but it seems likely it will.
In previous crashes, the bull has been slow to die, so it seems likely to be the same this time, fighting all the way through the long testing phase before finally giving up for a few days of panic selling, which would likely be triggered by the sudden orchestrated event, like I saw in my dream.
If we don’t see panic selling beginning during Passover, I believe it is because we are following the historical pattern, which means it will come later on. I would expect some people will become skeptical while others will persevere in faith regarding what God has already revealed to them. Hopefully this post will also help answer questions.
My purpose for sharing the patterns discussed is to shed more light on what is coming, not to negate anything God has revealed. I still believe the prophetic insights, but the same God who revealed those things has also revealed the wisdom in understanding the patterns, so I believe we need both.
More time and effort went into this post than any previous post. It took longer than I wanted because it required many hours of phone calls and research to pull together. In my replies to comments during the past month or so, I have been sharing summaries about what I have learned from these historical patterns, including the pattern of 40 to 44 trading days and my own plans to cover all of June with any options purchases.
I believe knowing the sequence of steps followed in previous market crashes can help us make smarter investment decisions, but it is provided for information purposes only and is not a recommendation for investing. I have found it helpful in developing my own plans, which now include taking profits on short positions when the market hits bottom, then taking long positions prior to the big bounces.
Note: Special thanks to businessman and market investor Aaron Brickman for explaining these historical patterns to me and sharing his data. He also explained the historical patterns do not have to repeat because they are just patterns, not predictions. This article would not have been possible without his help.
Author: James Bailey
James Bailey is a blogger, business owner, husband and father of two grown children. In 1982, he surrendered his life to the Lord Jesus Christ. In 2012, he founded Z3news.com to broadcast the message of salvation by reporting end time news before it happens.
© 2016, Z3 News. The first 200 words of Z3 News articles may be shared online in exchange for a clickable link to our site. Please include the author name and do not make any changes to text or titles. No image files from our site may be shared because we don’t own them. For permission to use our content in other formats, please contact us.