2008 VS 2020 – What we learned from the past

2008: A brief walkthrough

The 2008 financial crisis, which was a financial and economic crisis that affected the whole world. Many believe that the 2008 financial crisis was the worst crisis since the great depression during the 1930’s.

The 2008 financial crisis was mainly caused by the subprime loans, there were more factors that contributed to the crisis, such as:

  • Reckless lending Many banks would lend money, a lot of money, to a lot of different people / companies / other banks / …
  • Low intrest rates Low intrest rates will encourage a person / company to take a loan
  • US housing bubble burst The burst of the US housing bubble led to a rise of the intrest on the subprime loans, which led to people / companies not being able to pay their intrest

2008 in charts

In my previous article ‘How the COVID-19 virus could start a new recession’ I mentioned which emotions and feelings go along with a crisis, the chart below shows these emotions very well:

2008: From 1500 to 750

The chart above is the SPX500, the SPX500 is a stock market index which represents the performance of the 500 biggest companies in the US. Each county has it’s own indx representing their top 20, 50, 100, … companies in one index.

As a result of the 2008 crisis the SPX500 fell from $1500 to $750, or 50%. The $750 level was a key reversal point for the SPX500 because of the following reasons:

  • Key level :$750 is exactly 50% of the al time high (psychology)
  • Fibonacci: the 61.8% had a great confluence with the $750 level

What happend since then?

Since the 50% retracement, caused by the crisis, the SPX500 has soared 400.5%! Bringing the price to an all time high (ATH) of $3400. It took over 11 years to make the new ATH while the 50% retracement took about 2 years.

Since the ATH made on the 19th of februari the SPX500 has plunged 31.9%. Bringing the price to $2300.

source: Factset and CNBC

Key takeaways:

  • The SPX500 respect psychological, round levels
  • The SPX500 dropped 50% since the 2008 crisis
  • The SPX500 respected the 61.8 FIB
  • On average, bull markets last 6 time longer than bear markets

2020 in charts

By reviewing the 2008 crisis and how it affected the SPX500, we can implement our findings onto the chart below:

Finding #1 – Levels

As mentioned before, the SPX500 retraced 50% during the 2008 financial crisis. We can implement this knowledge into the new scenario: The SPX500 reached the $3000 level and reached slightly above, yet i will still use the $3000 level as my reference because it’s a round, psychological level.

If the market is going to repeat itself, which it does a lot of the times, meaning a retracement of 50% from our $3000 level would bring us to the $1500 level again.

Finding #2 – Support

The $1500 level is a strong support level. Since the year 2000 and 2008 the SPX500 tried to break out of the resistance at $1500 TWICE, both times unsuccessful. It wasn’t until 2013 when the SPX500 finally broke out of the 1500 resistance.

Finding #3 – Trendline

On the chart you’ll see a trendline which protects the price from breaking out to the downside. Since last week the price was actually able to close the weekly candle below the trendline. If this trendline is broken impulsively on the monthly timeframe, more downside momentum can be expected

Finding #4 – Fibonacci

Our final finding will be the FIB. Our monthly fib, drawn from the monthly low ($734) to the end of the impulse ($2830), shows how 61.8% FIB aligns perfectly with the $1500 level. This adds confirmations to all our previous findings.

Also, look al how well the -27% has been respected, touch and go!

Possible scenario

Possible scenario

We hope you enjoyed this article.

Kind regards

Hisham and TFD team.

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