Authored by Dmitri Speck via Acting-Man.com,

Anatomy of Waterfall Declines

In an article published in these pages in early March, I have discussed the similarities between the current chart pattern in the S&P 500 Index compared to the patterns that formed ahead of the crashes of 1929 and 1987, as well as the crash-like plunge in the Nikkei 225 Index in 1990.

The following five similarities were decisive features of these crash patterns:

– a rally along a clearly discernible trendline on a linear chart

– an accelerated move toward a peak at the end of the advance

– an initial decline testing the trendline

– a counter-trend rebound

– a break of the trendline

After the trendline was broken, waterfall declines began in the three antecedents of 1929, 1987 and the Nikkei in 1990. In early March, I pointed out that the decisive development was the break of the trendline on the second test. What has happened since then?

A Waterfall Decline Threatens After the Trendline Break

This time the rebound from the initial test was a comparatively lengthy affair. However, prices ultimately retreated again and last Friday, March 23, the broad US stock market indeed broke through the trendline. Below is an updated three year daily chart of the S&P 500 Index with the trendline.

S&P 500 Index: On Friday the trendline was broken (it was briefly regained on Monday, see  closing remarks on that point).