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THE CRASH OF 1987

Whether or not the stock market correction of 1987 is considered one of the more significant stock market events

of the century, at the time it seemed as if the financial markets might be on the brink of disaster or that we had

begun another severe bear market like that of 1929-32 Those with a knowledge of market history and long-term

Fibonacci support and resistance levels might find some comfort in realizing that the 1987 stock market correction

stopped on a dime at a key Fibonacci support level.

Ralph Elliott discussed key support at the 38.2% and 61.8% retracement levels of previous advances. It was very common for a market to retrace either 38.2% or 61.8% of its previous advance before it began another stage

of growth. (The 0.618 or 61.8% level is the inverse of the 1.618 relationship found in the Fibonacci sequence [1/1.618 = 0.618], and 38.2% represents the relationship between alternate numbers in the Fibonacci sequence and is

also the result when 61.8% is subtracted from 100%.)

At the bottom of the crash in 1987, on Tuesday, October 20, the DJIA bottomed at 1706.9 on a print basis, just over 30 points lower than it closed on the day of the crash, the day before. On a theoretical basis, the market registered a low almost 100 points down since the intraday, and opening prices of stocks were extremely volatile the day

after the crash. At its high in 1987, the DJIA peaked on August 25 at a print high of 2736.6. Subtracting the difference between the DJIA’s print high on August 25 and print low on October 20, we come up with a distance of

1,029.7 points. With a quick calculation, we find that the crash itself corrected 37% of the market’s entire value itself in 1987, so we might naturally look for larger retracements of 50% or 61.8% of previous advances.

But hidden behind all of these dates and price levels is the entire advance from 1932 to 1987. The 1932 low of 41.22

(closing) to the print high of 1987 at 2736.6 shows that the entire crash of 1987 corrected 38.2024% of the entire 55-

year advance. If we wish to use the theoretical low of 1932 at 40.56, the correction is 38.1931%. The actual Fibonacci ratio between alternating numbers is 0.381966, or 38.1966%. Figure 2 shows the 1932 to 1987 advance on an arithmetic (nonlogarithmic) chart.

With the 1987 low as a long-term support level in the DJIA, if the 9600 to 9800 area were reached in the next

several months, we might look for retracement levels of 38.2, or 61.8% of the entire advance from 1987. That has yet to be seen, but it would be a likely area to look for support. In any case, we know where the numbers stand and how they were generated. It is now up to the market and Fibonacci to validate their usefulness.

With the 1987 low as a long-term support level in the DJIA, if the 9600

to 9800 area were reached in the next several months, we might look for retracement levels of 38.2, or 61.8% of the entire advance from 1987.

Kevin Murphy began investing in 1972 and entered the financial industry as a broker in 1990. During his first

years as a professional, he ranked in the top 10 nationally in the CNBC/FNN and USA Today National Investment Challenge professional options division from 1990 to 1992, with returns ranging from 500 to 800%. In 1993, he won first place with a return of 1,978% over a period of three months. He currently manages private money and teaches Elliott wave and Gann seminars throughout the US.