'After the 1929 crash, the second most notorious market crash the US markets have witnessed happened one autumn day in 1987. On October 19, 1987, the DJIA plummeted ferociously, losing more value in percentage terms than it had lost on October 29,1929. Although the odds of success were small, an anti-free market intervention by a strike team of large money-center banks led by the United States Federal Reserve injected unfathomable amounts of liquidity into the system following the plunge. The literal deluge of capital wrought a near miracle and was able to short-circuit the dangerous emotion of fear growing in American investors, the �crash� was frozen in its tracks, and the DJIA resumed its bull market. As the market curiously continued its upward trajectory right after the crash as if nothing had happened, this is really not an example of a �normal� bear market scenario.
In this exceptional case, there was really only a single volatility top. There is a small initial spike of intraday volatility that happened before the crash, which is circled and noted with a green question mark, but the spike is so small it is stretching credibility to label it a volatility top. Immediately after the crash, as expected, there was a massive spike up in the 100 day moving average of intraday volatility that culminated in a decisive top. Due to the extraordinary intervention by the Fed and its consortium of banks, the bull trend of the market resumed immediately while the bear continued hibernating in its cave. The light blue dotted line is the linear trend of the DJIA data series, and it is NOT in a bear market orientation.
Because the usual historic pattern of bubble, crash, bear market, and finally bear market bottom was truncated through government mucking around in the markets, the double volatility signature is not observed in the 1987 crash. Rather than letting the healthy bear cycle run its course to sop up speculative excess, the US Federal Reserve decided to allow the speculative imbalances to continue to grow. With official sector coddling, the bubble grew and grew. It was nurtured slowly until 1995, at which point the M3 money supply took off like a fox with its tail on fire, witnessing compounding growth rates and levels unprecedented in history.
Much of the new blizzard of monetary liquidity found its way into US equity markets, ultimately begetting the infamous NASDAQ bubble of 2000. Since the 1987 event was an extraordinary occurrence that did NOT really reflect normal free-market forces, it is not surprising the double volatility top signature did not appear. As the Federal Reserve and its cronies openly admit today that they �saved the system� through blatant intervention, we believe the lack of the double volatility top signature in this case simply reflects the fact that a normal bear market was delayed.