The Two Prior 7 Day Declines in the Dow since 2000

October 10, 2008

I thought it might be helpful to look back since 2000 to show the two previous times the Dow Jones Index was down seven consecutive days in a row.  The next two charts show the before, during, and aftermath of these instances for you to see for yourself.

The first time it happened since 2000 was just before and after the September 11th terrorist attacks in the USA.  The Dow had declined three days prior to the attack, and the market was closed for a week after the attack.  Here is what the chart looked like then:

(Note:  I programmed a strategy to identify these times and as an exit, I programmed a 16 day time exit - you may ignore the green bar - I don’t discuss it.  16 was an arbitrary time-based exit I chose).

The market actually fell for 8 days in a row before recovering sharply back to the 10,000 level by the end of the year.  Price ultimately went lower, bottoming at 7,200 almost exactly a year later in 2002.

If you are astute, you notice the red highlighted price bar “8,579.”  That’s TradeStation’s way of saying “This is what the currently symbol you’re looking at closed at most recently-” in other words, the Dow Jones is currently very near the price levels achieved on the 9/11/01 attacks - let that sink in for a moment.

Ultimately, price peaked at 10,600 in March, 2002 before heading lower to bottom in October.

The next time it happened was in mid-2002 in the throes of the Bear Market a few months prior to the actual bottom.

If you look closely, you see my strategy (buy at the next open after a seven-day consecutive decline occurred) fired actually in the middle of the consecutive move.  There was a white (up-day) candle in the middle, and were it NOT for that solitary up-day, price would have closed for 12 days in a row - remarkable.  I label the down days, excluding the single up day.

Price ultimately “snapped back” but not before plunging 1,000 more Dow points before a reversal.  Even then, the ’snap-back’ reversal only took price to 9,000 before plunging down to 7,200, marking the Bear Market bottom (price ultimately retested this low in March, 2003 before beginning the Bull Market that ended just a year ago - October 2007).

So now that the Dow Jones index has declined 7 days in a row, which will it be? A snap-back rally or a continuation?  We can go back further to test, but since 2000, a seven-day consecutive price decline has happened only two times, and for both times, a divergently different outcome resulted.

Be safe, guard your capital, and don’t expect a rally “simply because it is due.”  It may happen; it may not.  Either way, price is likely to move violently, quickly, and (perhaps) erratically.  If you’re on the wrong side, you will lose capital quickly.  It might be better to wait until the waters calm down a bit before stepping back in.

NOTE:  If you are a TradeStation user, here is the simple code I programmed to run this study.  You can use it to test different indexes over longer time periods.  Simply add more days or subtract days (in the close[7] lines) for more analysis, including possible exit/stop-loss strategies:

if close<close[1] and
close[1]<close[2] and
close[2]<close[3] and
close[3]<close[4] and
close[4]<close[5] and
close[5]<close[6] and
close[6]<close[7] then

buy next bar at open;

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