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There was one time that it bounced off that $1000 price level. Here, it broke through a little bit, but it still backed down after breaking through that $1000 level. Here, we hovered around it for quite a few months before it backed down again. Do you notice something, here?
Let’s take a look. Right around here, and then again here, where it finally broke through. What do you notice about all the times it hit that 1000 point level? It was a very narrow level. It was only one little uptick in the bar right here, a very little narrow wick at the top of this bar, that sent prices much lower. It was a very narrow 2 little bars that sent the stock market lower.
Some people would argue that perhaps it was the psychological level of hitting 1000, that caused people to sell, and that’s the reason for the decline. We came up again, against this type of resistance at the 1000 level, here. We sold it off even stronger, for a lower low, here. The next time we came up to the 1000 level, it broke through a little bit stronger than the last time.
This time, it didn’t even break through, but it seemed to shoot through there. For a couple of months, it was hopeful that it could stay above 1000, but again, it sold off. It sold off even deeper than the last time. The next time it came up to the 1000 level, we had almost 9 months of hovering right around that 1000 price level.
Do you think that it’s more significant at this point, than it was at the other points? Yes, because we spent a lot more time in that area. People became a lot more comfortable with the index at 1000. Here, maybe they didn’t think that it was possible that the index and stocks could break through 1000.
It’s very psychological. When it came back up here, and it sold off dramatically, they said, “I don’t think we’re going to be able to break through this 1000 level.” When it came back up here, they said, “Yeah, we can push it higher.” They did, for a little while, and then it sold off again.
When it came back up to this level again, they actually spent 9 months out of this 1976-1977 area, hovering around this 1000 level. People became comfortable with that level. The selloff from that was much less dramatic. In other words, this was a turning point in the psychology of this market. It didn’t sell off as much as the other points. It spent a lot more time at these levels. When it came back down, it consolidated a little bit, came back up, spent another 4 or 5 months here, and sold off again. Again, you have higher lows.
Higher lows was an indication that the next time this tried to get past 1000, it would simply break right through. And it did. It broke right through. It came back to be tested again, and that’s one of the principles that we are going to talk about. It did break through. This psychological level of 1000 no longer was resistance. It became support. From then on, the market absolutely took off.
Look at the exuberant run-up here. Have we seen this kind of run-up before? Yeah. We saw it a number of times. We saw it in 1929. We saw it in 1946. From 1983, when the market broke through, you can see that we had a tremendous run-up, all the way to mid-1987.
That’s why we had an exuberant run-up, and what happens when we have an exuberant-run up, where we have these large price bars going right to the sky? Well, some people say that it’s too high. Psychologically, they couldn’t take that kind of height. Prices sold off dramatically.
This is probably the first time since 1929 that prices sold off so dramatically in a single day. This is actually a monthly chart. Let’s go to a daily chart. I’ll show you exactly what those days looked like, during that month. We had a fairly significant run-up in prices. There were very strong prices, running up to this level. We started selling off, came back up again, and then boom. It just fell apart.
On the monthly chart, it doesn’t look that bad. It looks like one big, long bar down. The fact is, this happened over the period of a month, and it was a pretty dramatic sell-off. It was a very scary time. This is when I started trading.
Let’s go back to the daily again. This time right here was very interesting, actually. I started trading around January and February of 1987. You can see in January – April, prices did nothing but continually run up.
I was making $1000-$1200 a week, during this time. I thought I could do no wrong. I knew prices were going to start pulling back. I actually started buying some puts at these levels. I made $32,000 over the next couple of weeks, in this period. It was tremendous. I had a feeling, because of the exuberance of this run-up, that prices were going to fall dramatically.
And they did. Except down here at the bottom, I thought they were going to continue to go lower, and they didn’t. Over the course of the next couple of months, prices continued to forge higher and higher. I lost quite a bit of money during that time. That was my first introduction to losing money in the markets.
If I had been right here, in this area instead of this area, I would be a multi-millionaire, back in 1987. There were a lot of people who purchased puts in this area – a couple of market-makers in particular, who did make millions during this period right here.
Once again, even though prices sold off dramatically, look what happened. Prices began to stabilize. They moved up and down. They go up and down. Eventually, what happened? Well, we had some resistance right in here – another psychological level, right around 2800.
Let’s draw a little price level there. We’ll go back to our monthly chart, because it’s a little bit easier to see the detail here. We hit this resistance level, right around 2,750. We touched it here, and it sold off. All of a sudden, the psychology changed, because the next time we came up against this resistance level – even though we did sell off a little bit, the sell-off wasn’t very strong.
We actually hovered in this area for 8 months without a dramatic sell-off,