| Don't Get Caught By A Stock Market Crash! Follow This Simple Tip |
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| Written by Dave McLachlan |
| Friday, 12 February 2010 20:52 |
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Everybody knows about them: Stock Market Crashes, the likes of 1987 or 1929. And they are feared among many if not all investors.
Everybody knows about them: Stock Market Crashes, the likes of 1987 or 1929. And they are feared among many if not all investors. 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 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. 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 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. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. 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. |