1937 vs 2007 Bear Market Correlation (by TheInflationist)

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This is our first post on SOH – hope this finds its way to fellow Slopers (Thanks Tim).

1937 vs 2007 fibonacci correlation by www.theinflationist.com
1937 vs 2007 fibonacci correlation by www.theinflationist.com

Although
the backbone of our analysis is NOT based on fibonacci numbers or
anything conventional, our analysis and comparison of 1937 vs 2007
produced uncanny results.

In 1937, DJI peaked at 194.4, bottomed at 98.95 and subsequent bear
market rally peaked at 158. So it dropped 95.45 points from peak to
bottom. Of this, the bear market rally regained 59.05 points
(158-98.95). The ratio of retracement 59.05/95.45 = 0.6186. For those
of you who are not aware of the principles of Fibonacci and its
application in trading, Fibonacci numbers are numbers where each one is
the sum of the previous two numbers. Read below for more details on
Fibonacci numbers. We arrived at this ratio inadvertently, without even
realising the significance of 0.618 until it was pointed out to us
.
Coincidental? Perhaps.

Regardless, we applied the same Fibonacci ratio to the current rally
in an attempt to see where this rally will peak. Based on the same
Fibonacci ratio, a peak of 11255 will produce the same retracement as
1937. This has to be a closing price, which means the high of the day
will probably hit 11300 for those trading with a sniper rifle (we prefer the shot gun approach!).

We are concern enough to scale back some of our additional shorts
opened Friday, to provide sufficient firepower to short 100% at 11300.
11300 appears high enough to wipe out the remaining bears in our camp
and provide the undoubted confidence in bulls. This would fit with a
"blow off" top we have been talking about. We will take the little
profits we have from our S&P shorts opened Friday. Also will look
into the weekly (or monthly if available) Binary Index trade for 11300
as insurance.

We have a busy weekend ahead so we will rush this analysis to print. We will add more to this as time permits so do check back.

Why compare 1937 with 2007 ?

For new readers, our attention focused on 1937 after we compared all
previous significant bear markets since 1929 and the Nikkei's 1989
(because of the similiarities in monetary policies quoted by many eg
"Mish" Mike Shedlock) – and found that 1937's chart looked identical to
the current. Check the full post here.

www.theinflationist.com
www.theinflationist.com

We then zoomed in on 1937 after noting the striking resemblance and compared with the current decline in more detail here.
We were not sure though, whether the current rally equivalent was at
point A or B (see below). We felt that if we were at point A, then that
would mean that we have topped at 10500, and to expect a pullback
before further rally to hit 11000 at point B. When news of Dubai
default came up, we thought "Perfect timing!" – and that it was going to be used as the "excuse" for
the expected pullback. That was not to be as markets resumed the rally
after the weekend to make higher highs.

1937 Crash Vs 2007 Bear Market

We then searched the web to see if anyone else saw this. We found
one – Louise Yamada. She tries to explain the similarities of 1937 and 2007 both
from a fundamental and technical perspective. Here is what she says about 1937 vs 2007
(2/5 videos)

Where to From Here ?

1937vs2007fibonacci2

Good luck to all.

———————

Fibonacci Numbers, Fibonacci's Golden Ratio

0

1

1

2

3

5

8

13

21

34

55

89

etc

The division of any two adjacent numbers gives the amazing Golden number e.g.
34 / 55 = 0.618

It is called the Fibonacci series after Leonardo of Pisa or (Filius
Bonacci), alias Leonardo Fibonacci, born in 1175, whose great book The
Liber Abaci (1202) , on arithmetic, was a standard work for 200 years
and is still considered the best book written on arithmetic. It was the
principal means of demonstrating and introducing the enormous
advantages of the Hindu Arabic system of numeration over the Roman
System. Leonardo's reputation amongst scholars was deservedly great. It
was so outstanding that King Frederick II, visiting Pisa in 1225, held
a public competition in mathematics to test Leonardo's skill and he was
the only one able to answer the questions (Huntley 158). Fibonacci
ratios occur naturally around us: width vs height of picture frames, no
of petals in a flower, etc (see the mystery of Fibonacci Ratio and Numbers)