“Those who fail to learn from history are condemned to repeat it.” – Winston Churchill.  “History never repeats itself in the same way.” – Ehud Barak… 

The reason pattern analysis works is because history repeats itself; it just never looks exactly the same way twice….  We have 2 charts below.  First is the present 3 year daily chart of the C fund.  The second is a 3 year daily chart of the C fund from August 2006 to August 2009; the last major stock market top and crash.  We’re going to talk about some similarities and differences between the charts and see what we can learn to minimize risk going forward.  

* The underlying economy, company earnings, politics, world events… are all different today than they were in 2008.  We are comparing apples to apples of CHARTS only!  Not trying to predict the future, only trying to use history as a guide to manage risk going forward *

Similarities

  1. The C fund lost almost 20% from the top in October 2018 to the low in December 2018.  The C fund lost about 20% from the top in October 2007 to the low in March 2008.
  2. The C fund has recovered about 15% from the December low, pushing thru the 50DMA and approaching the 200DMA.  The C fund recovered 16% from its low in March 2008, pushed thru its 50DMA, then hit its 200DMA.
  3. There was an initial breakdown in October 2018, followed by consolidation as the 50DMA crossed down thru the 200DMA (Death Cross), followed by another breakdown to the December 2018 low.  There was an initial breakdown in October 2007, followed by consolidation as the 50DMA crossed down thru the 200DMA (Death Cross), followed by another breakdown to the March 2008 low.   

Differences

  1. The topping pattern from November 2017 to November 2018 is similar but not the same as the topping pattern from April 2007 to January 2008.
  2. The consolidation at the Death Cross is similar but different in both charts.
  3. The second move lower is similar in both charts.  The big difference is the V bottom in the present chart vs the double bottom from January to March 2008.

This week we are retesting the 200DMA for the first time since the December bottom.  Look at what happened following the first retest of the 200DMA in 2008…  

I am NOT saying we will see a repeat of 2008, where the market dropped 45% after that first retest of the 200DMA.  I’m just making a case to be very cautious until this plays out… History has a tendency to repeat itself…