Tuesday, 11 Nov 2008
Recession or Depression? Finding the Trigger ...
Posted By:Daryl Guppy
The market also leads a recovery. In a recession, the market will develop strong trending behavior many months prior to the official confirmation of the end of a recession. This recovery provides trend trading opportunities.
In a depression the market will develop a long-term consolidation pattern. This is an investment period that lays the foundations for generational fortunes. Trend-trading opportunities do not develop for several years. This consolidation and accumulation phase concentrates on creating income flow from dividends. The fundamental end of a depression is not recognized until many months after the market has already reacted.
Right now, market is hovering near significant support levels. The closest of these we call recession support targets. The lowest of these we call depression targets. Many analysts have compared the current market situation to the market collapse in 1929. This week we look at charts from the 1929 period. In particular we look at the similarity of behavior.
The above chart is the weekly Dow for 1929 to 1930. The significant features are these:
The rapid fall is followed by a rebound and rebound failure.
The primary rebound failure occurs rapidly with another market collapse.
The pile driver low is retested within 12 months
Support, defined by the pile driver low, is not successful.
The low of the market develops in 1932, about three years after the 1929 crash. The key trigger is the failure of support set by the pile driver low. The disaster is that it takes 25 years for the market to exceed the high of 380 set in July 1929. This is why the Depression is referred to as a generational event. The current situation has the potential to have the same generational impact.
SEE CHART ABOVE
The key trigger that separates a recession from a depression is the behavior of the rebound from the pile driver low. After the 1987 crash the rebound quickly developed strong trending behavior. The move above the midway point in the market fall signaled a continuation of the uptrend. This is recession behavior. Depression behavior is when the market fails to move above the midpoint of the extreme fall area.
On the current Dow chart, the area near 12,000 is the key level to watch. Failure to move above this level suggests a depression scenario may develop.
A sustained move above 12,000 signals a recession. There is one caution in this analysis. The Dow has not yet developed a confirmed pile driver bottom pattern on the weekly chart. The low of this pattern will determine the mid-point resistance level that is used to signal a recession recovery.
Markets will not behave the same way as in 1930, but they will develop in a similar fashion. There is a high probability that these behaviors will develop in shorter time frames.
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