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Comparison of Market to 2007 Patterns

It's Too Clean

I'm not a huge fan of market analogs.

So when a chart comes up comparing the market we're in to some other time in past history, it leaves me with a healthy dose of skepticism.

But sometimes, I get sucked in.

If you tilt your head just right, you can see it

Below are two charts. The top is a price chart of the $SPX from 2007 to early 2008.

The bottom chart is the current market. See the notes attatched, and you can click to enlarge.

Could this just be a human fallacy of pattern seeking? It's possible. But let's entertain for the moment that we have price "rhyming" with the chart.

Well, the 2007 top was a year before the 2008 presidential elections. So if you're into the election cycle theory, this is lining right up with the 2007 price chart.

The "big weekly" tail that was printed seems to be the target for most right now. The mid-march lows have not been retested on the $SPX, but they have on the $IWM (smallcaps). That condition occurred back in 2007.

My crystal ball

So from here? If it were exactly like the 2007 levels, we should expect a retrace to 30% of the recent downmove, or about 1340. That should take 3 weeks.

From there we see a failure, a retest of the most recent lows, and then a probe of the "big weekly tail" that fails, which would lead to the start of a downtrend.

It's never perfect

There's a few differences here: the magnitude of the moves back in 2007 were much larger on an absolute as well as percentage basis, so the outcomes should be different in terms of downside expectations. Also, we don't have the financials anywhere near the levels in the past so the amount of damage they could do is mitigated. Also, we've yet to see a real oil spike that would cripple the consumer.

 

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/