How To Avoid A Stock Market Crash Like 1987 or 1929
If there is anything that strikes fear into the hearts of stock market investors, it is a major stock market crash.
Tales have been told of investors going bust, of the savings of an entire generation disappearing, and how it happened quickly and without warning. But is this true? Was there really no warning of an impending stock market crash? In this article I am going to show that there are warning signs, and how you can avoid future crashes.
The simple fact is, in both major stock market crashes like 1987 or 1929, there are a few clues we have that will alert us to a crash in today’s market.
The first is that prices started falling weeks before the actual stock market crash occurred. In the case of 1987, a full seven weeks of lower prices from the previous high happened. In 1929 it was also seven weeks from the previous peak.
Our second fact is that while prices fell for seven weeks, there was a bounce in between. This means that from the peak prices were falling, but they actually rose for one to three weeks, and then fell again – this time through the previous trough in price. And guess when the crash was? That’s right – the very next week.
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.
But Dow Theory isn’t just good at finding possible crashes – it warns of bear markets and recessions too. In fact in late 2007 well before the “experts” were talking about bear markets or recessions, you will see that same little zig zag down, giving fair warning to us all. It can be severe like 1987 or 1929, it could be slow and drawn out like 2008, or it might just reverse and go back up again.
The truth is, the probability is around 70%, which is still extremely high when investing in the market.
So what does this mean for a trader or investor like you? It’s simple. If you see the price on the index fall, then bounce for one to three weeks and then fall again through the previous trough in price, now might be a good time to lighten some of your positions. It pays to be ready, and if it doesn’t occur you can always get back in.
Get more ways to avoid a stock market crash and make more money in the stock market at Dave McLachlan’s site, www.ASXmarketwatch.com.
