Bulkowski's Review: Black Monday and the Crash of 1987

Written by and copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved.

I was in the market back in 1987 and suffered along with other traders when the Dow Jones Industrials crashed 31% from Thursday's close to Tuesday's low - 3 trading days, a loss of over 700 points. On Black Monday alone, the Dow closed 508 points below the prior close, a drop of over 22% in one session. Even now, it is enough to bring a tear of nostalgia to a short seller's eye.

Below is a review of 1987 and Black Monday, October 19, 1987, from a technical analysis perspective.

1987: Dow Industrials

The above chart shows the Dow Jones Industrial Average during 1987 on the daily scale. A symmetrical triangle with an upward breakout appears in February, suggesting additional advances. The falling wedge in April was a loose pattern and that meant poor performance. Price broke out upward but soon collapsed, nearly dropping to the low where the falling wedge chart pattern ended (the dashed line near C).

I discovered the bump-and-run reversal top in 1996 well after the pattern appeared back then. The downward breakout followed by a pullback to point A allowed traders to take profits before the decline really began. Even if you did not know of a bump-and-run reversal top, the long green trendline shown on the chart was a warning unheeded by many, including me. Price broke through that trendline at B about a week before Black Monday.

I remember the Friday before Black Monday. The Dow dropped 109 points and I was startled at the size. I did not have a clue about the size of the decline coming the next trading day.

On Black Monday, the Dow dropped another 508 points and took the wind out of traders. In the coming weeks, I jumped back in and bought what I could. Price formed a large symmetrical triangle, becoming the bounce phase of a dead-cat bounce chart pattern. After that, price moved almost horizontally (with a slight trend up), busting above the old high set in August 1987, nearly two years after Black Monday.

1987: S & P 500 Index

The Standard and Poor's 500 Index shows a similar tale. A symmetrical triangle formed in February, just as it did in the Dow. An Eve & Eve double top indicated weakness in March and that took prices down to the triple bottom low in April. There, the top of the triple bottom formed ascending peaks, so you could also call this a broadening formation, right-angled and ascending chart pattern.

What you call it is irrelevant. Price took off in a straight-line run up to a bump-and-run reversal top. This pattern had another Eve & Eve double top appear. Price confirmed the pattern by closing below the valley between the Eve peaks.

Then, an Adam & Adam double bottom signaled a bullish resumption of the uptrend when the index broke out upward. But the new bull run did not last long. A few weeks later, the Adam & Adam double bottom busted when price closed below the twin bottoms (the Sell Line in the above chart). That was the sell signal. Within days, price was tumbling, forming a dead-cat bounce.

1987: Nasdaq Composite

The last chart shows the Nasdaq composite on the daily scale. Price formed an inverted and ascending scallop chart pattern during February to April. Another bump-and-run reversal with a dual bump (A, B) appeared at the top of the chart. This time, an Eve & Adam double top warned of a bearish turn. Price confirmed the pattern when it closed below the valley between the two peaks (indicated by the green dashed arrow). Just days later, Black Monday occurred and surprised everyone. Price bounced in the dead-cat bounce pattern but made a higher low, which is unusual for the pattern. In that regard, the chart pattern resembles an ugly double bottom.

In the months following Black Monday, price climbed at a good clip, peaking on October 13, 1989. From there, the index dropped again over many months this time.

-- Thomas Bulkowski

Copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved. Afternoon is defined as that part of the day we spend worrying about how we wasted the morning.