Stock Market Crash – the very words strike fear into the hearts of many investors.
Stories are still told of how these two events in 1987 and 1929 alone wiped out entire generations of wealth. And that it happened so fast they didn’t see it coming. But how quickly did it really happen? Were the warning signals there? In this article I will show you a quick and easy method for being aware of an impending stock market crash, and how you can avoid it.
The truth is, both of the major stock market crashes through 1987 and 1929 yielded many facts that we should be aware of, and we can also spot them in the future.
Number one is that prices in the market fell quite a while before the stock market crash occurred. In fact in both cases of 1987 and 1929, prices fell for a full seven weeks, from the peak to the start of the crash.
The second is that even though prices did fall for seven weeks prior to a stock market crash, there was a bounce in between. What this means is that prices fell, then they rose for one to three weeks, before falling back down through the previous trough in price. And the week after is when the stock market crash happened.
Take a look at this price action on a price chart, and it will look like a zig zag downwards. This zig zag was noticed by Charles Dow in the late 1800s, who coined the theory as his own, and as we now know it: “Dow Theory”.
So, it’s pretty simple so far, right? Yes, but does a stock market crash happen every time we see a zig zag down in price? In simple terms, no. This zig zag can happen quite often, especially when we look back over the last century.
However Dow Theory doesn’t just warn of crashes – it works for Bear Markets as well. In fact if you take a look at 2007 – a few months before the “experts” were talking about recession – you will see a quiet little Dow Theory zig zag down. So sometimes the move will be severe like 1987 or 1929, sometimes we may get a recession, and sometimes it may just turn around and go up again.
Overall, the probability is high though, at around 70%.
So what does this mean for you? It’s simple. As an investor, if you see price fall, bounce, and then fall through the previous trough (most notably on a weekly price chart), then it might be a good time to lighten some of your positions and be ready. You can always get back in again if a crash doesn’t happen.
For more tips on how to avoid a stock market crash, visit Dave McLachlan’s site www.ASXmarketwatch.com. You can get a free course on investing, free research and free articles!
categories: stock market, investing, trading, finance, money, wealth
