With every down move in the stock market, the first thing that comes in mind – Is the stock market going to crash ? Well, it’s very difficult to say that. Not all of these continue to stock market crash, while stock market crash starts with such down moves. How to know, if stock market is really going to crash? What should we do as a protective measure in such situations? This article, within it’s scope would try to explain the most important facts, do’s and don’ts in a situation like this.
First and the foremost thing is to close your ears to rumors. Whenever markets plunge, rumors take on charge. Stock market has a sentiment driven environment and you have to ignore such things. Trades suffer unnecessary loss due to early exit from position and taking wrong position. Judge the facts in the environment yourself. During such situations, even some ‘stock market expert’ may get you confused with their stock tips. So, stop asking yourself ‘is the stock market going to crash’ based on rumors.
Judge The Environment
It’s strange, but when stock market is about to crash, everyone else is positive. People keep talking about higher market levels and new targets. Analysts talk bullish and advice buying. Then suddenly market starts falling. Market crash is unlikely when people are cautious and withdrawing their money slowly in anticipation. Crash do not allow you time to exit at own will. Some behavioral signs are here:
- Panic Buying – Investors jump into buying as if they won’t get another chance to get in.
- Emotional Buying – People get attached to the stock market emotionally, and find hard to believe that it’s overbought or overpriced.
- Ignorance to Fundamentals – Investors start buying ignoring fundamentals. Stocks with poor fundamentals start soaring. Greed and fear take over.
- Over optimism – Everyone become so optimistic that past memories of stock crash are forgotten
Analyse the Key Facts
There are some key factors to be looked into. When these are healthy, stock market should remain stable. Remember stock markets may crash globally, due to many reasons and one market pulling down another. But still these factors are somewhat useful in predicting a possible melt down for internal market.
- Global Markets – unsteady global markets indicate bad signs around
- Rising Rates – Rising interest rates, credit insurance and treasury yields say we are near a top
- Dropping commodity index – We smell something fishy when commodity index is low
- Market Volatility – Market Volatility or volatility index increases much higher beyond previous levels
- Vulnerable Global Economy – Weakening economy or economic imbalance is a warning sign.
Look At Charts
If you know how to read charts then it would become very handy for you. Open index charts and look for market
support and resistance. Be confident if market is respecting the previous support levels. If you zoom out your charts and change the time frame to weekly, you should get stronger supports. As long as these major supports are not broken, stock market should not crash. With the help of some more technical indicators a trader get a forecast about an incoming stock market meltdown. Some important indicators that may indicate a downtrend and to be looked at are:
- Margin Debt Vs Market Index – Normally they move in coherence. Whenever, margin debt shoots up and crosses previous highs, traders should get cautious.
- Price to Earning(P/E) to long term interest ratio is an important factor to tell if stock market is overvalued
- Stochastic and MACD divergence in respect to stock market
- Overbought Market as shown by Relative Strength indicator(RSI)
- Negative or downward On Balance Volume(OBV) for top index futures
- Strong Resistance upside
- Breaching support key support levels
Don’t go but other’s saying. Judge the facts, look around and gather key information. Now ask yourself, is the stock market going to crash? If your answer is yes, then time to be cautious and protect your investments smartly and in a wise manner.
Image source: Money.CNN