Those who do not learn from history are doomed to repeat it.
OK, now lets look at the short term dynamics of a crash. My main focus will be on the many similarities between all three "crashes". I would also like to point out the one thing that has changed. Can you guess what that is? The points on the following chart are daily closing prices on the Dow Jones Industrial Average starting the week before the crash. The first percentage shown is on the Friday before the crash and is the percentage down from the record breaking high roughly 2 months before the crash. The second percentage shows how far down the market went from Friday's close to the bottom closing price (Tuesday in 1929, Monday in '87 & '97).
The last percentage is the short term bounce which only lasted 2 days in all three crashes. Here's a list of the similarities:
1) Tuesday rally the week before the crash.
2) Steep decline Wednesday-Friday before the crash.
3) DJIA goes down more from Friday close to bottom than it did in the 2 months from the top to Friday close prior to crash.
4) Crash starts/happens on Monday.
5) Crash happens during last two weeks of October.
6) DJIA bounces more than half way up from bottom close to previous Friday closing price in 2 days following crash.
The one thing that has changed is that the crashes happen faster now. In 1929 it took 2 days for the market to crash. In 1987 it was 1.5 days. In 1997 it was just over 1 day. The following intra-day chart gives us a closer look at this. The vertical lines represent the day's trading range from top to bottom. The hash mark on the right of the line is the day's closing price. You can see that the intra-day bottom for all 3 crashes is much lower than the closing price. You can also see that the true bottom for all three crashes happened on Tuesday, two more big similarites to add to the list.
Let's look even closer. Following is the best intra-day chart of the '87 crash that I could find. Although it is of the S&P 500, it is still of great value to us here. It shows us the radical intra-day swings in the market.
This chart really illustrates the panic that struck the market during the '87 crash. First, the Dow opens Monday morning 3.7% lower than it closed on Friday. Next it accelerates downward to close 22.6% below Friday's close. On Tuesday, it opens up approx. 15% from Monday's close and then rallys up to 18.9% above Monday's close. Then the market swings down extremely quickly. In 2 hours time the Dow goes from 2067 to 1616, a 21.8% sell off. That's more than 10% per hour! Then the bounce takes the dow back up to close the wild Tuesday at 1841. Next, Wednesday opens much higher than Tuesday's close, topping out at close on Wednesday just before the short term aftershock on thursday morning. Note that the '87 crash is different than the '29 in that on Tuesday it opened higher than Monday's close.
Next is an intra-day chart of October 23-29, 1997. This chart starts on the Thursday before the mini-crash. Notice the first flat line late on Monday. That was when the market was closed for 30 minutes due to the Dow falling 350 points. Then notice the effect it had on the market. It went down even faster! Then the 2nd "Circuit Breaker" came into effect when the Dow lost more than 550 points on the day. That was the 1 hour closure that stopped trading for the day. When the market opened on Tuesday it continued to fall rapidly for about 45 minutes, then bounced back up rapidly regaining about 60% of Monday's losses.
Please note that the "circuit breakers" have been changed from 350 & 550 points. Now a 10% decline will halt trading for 30 minutes, 20% for 1 hour and 30% will halt trading for the day. As you can see from the above chart, the trading curbs had no effect on preventing a price decline, and it could even be argued that they cause the market to go down even faster. The only reason that I mention them here is that if it is the Monday of the crash and you are approaching 30%, you will need to complete any buy/sell transactions before trading is halted. Tuesday open could swing wildly in either direction. Also note that the market does not need to fall 30% (3000 points) in one day for this to be the biggest crash ever.
On the next page I will show you how you can turn a very small sum of money into a very large sum of money in about 3 weeks time during the biggest crash in the history of Wall Street.