Dow - When to throw in the towel

Courtesy of seeitmarket.com

On the 25th anniversary of 19th October, 1987's 'Black Monday', Dow dropped 205 points (1.52%) to 13,343 last Friday. "Due entirely to poor earnings reports", some analysts said.

25 years ago, on the same day, Dow dropped 508 points from 2246 to 1738 for a 22.61% drop. It was reported that the decline was caused mainly by program trading. Other possible reasons were overvaluation, illiquidity and market psychology.

The selling started in Asia ahead of the US market, with the Hang Seng Index of Hong Kong dropping 11.12% from 3783 to 3362. On Tuesday morning, after the Dow's 22.61% drop, Hong Kong Stock Exchange suspended its trading for 4 days. When trading resumed on the following Monday, Hang Seng dropped a staggering 33.34% from 3326 to 2241. It finally dropped to a low of 1894 by early December 1987 for a total decline of 52% within 2 months.

On that Monday, KLSE Composite index dropped 12.39% from 409 to 358. When I was wondering what causes the drop, one of my friend called me, "Hi, you know what, there is a crazy soldier started shooting in Chow Kit area". The news was true but that was not the real reason. On Tuesday, following Dow's 22.61% drop, the Composite index dropped another 15.65% to 302. The ultimate low was 223.92 on 7th December, 1987, a drop of 45% within 2 months.

The question now is, "Can the US market hold ?". If Dow can hold above its previous low of 13,326 level, everything still in order, Friday's 205 points drop is the mini-wave ii as shown below.

However, if Dow continues to drop below the lower trend-line and its previous low of 13,326, I have to switch back to my previous pessimistic wave count as shown below - The mega wave 1 uptrend since March 2009 has finally ended.

A third possible wave count is as shown below, if Dow can hold above 13,000 level.

Dow is forming its sub-wave vi.

So, the crucial level is the 13,000 mark where I will throw in the towel once it is broken.


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