Developing a system to detect a stock market crash
During these volatile times when no-one really knows which way the market is going to turn, it becomes increasingly important to formulate your approach to the general market. If the market crashes, it does not really matter what stocks you have bought they will get dragged down too.
Wouldn’t it be nice if you had some sort of early warning system to let you know that there may be a serious crash coming?
I have spent quite some time developing a system that will warn me when a potential crash is coming. Also, the system will also warn me when there is a shock in the market (usually a precursor to a crash). I have even developed a system which will alert me to potentially good opportunities to get back into the market.
I have back tested it over the last 20 years and it seems to work very well.
I have developed this system using Stock Finder from Worden Brothers and it is based on solid technical analysis. Using seven different indicators I am able to accurately spot the conditions that lead to a large stock market crash.
The Chart is Weekly (5 days per bar). As you can see, there are thee indicators below the price history of the SP-500 chart.
- Bear Market Signal (Red) – This signal lets me know when to expect a serious stock market decline
- Shock Event Warning (Yellow) – This lets me know when there has been a shock event in the stock market that affected price considerably
- Bottom Alert – Early Buy Signal (Green) – This indicator allows me to see when the market potentially hits a bottom or is is an excessively bullish mind set
The signals are plotted along the bottom of the chart and relate to the price action in the chart.
How does the Stock Market Crash Detector work?
In November 2000 the system first flags a Bear Market Signal (the first red vertical arrow). Selling all your stocks at this time would have meant you exited the very close to the top of the Dot-Com Bull market (only a 9% off the top). Thus, securing all of your gains except for 9% during the boom. The market subsequently loses 38%
In May 2003, the Bear Market Signal ends and the first true bottom alert is signaled (Green Vertical Arrow). Entering the market here, would mean you would have entered the market again close to 10% of the bottom of the crash, thus maximizing your profit in the coming 2003 to 2007 Bull market.
In February 2008 the next Bear Market Signal is given within 11% of the top of the 2003 to 2007 Bull market. (second red vertical arrow). The market then declines 45%.
The bottom of the Financial Crisis crash is at 666 in March 2009. The first Bottom Alert for this crisis is 5 weeks later in April at 853 points. This enables you to get in early enough to realize the profits of the new bull market which moves up 40% from here.
Important Stock Market Crash Warning
Interestingly, in November 2011 the system also generated a Bear Market Signal. This was due to the volatility and speed of the July to August pullback. However this signal was very brief and has since been replaced with a bottom alert for week commencing November 4th 2011.
But take this as a warning. Although I am long in the market again, the fact that the conditions for a full Bear Market were met just recently, makes be very aware of the possibility for another Bear Market. Considering the situation in Europe and the U.S this could well be a reality. For now I am long until the market tells me otherwise.
Do you want to have the technical analysis skills to develop your own stock market crash detector? If so, then try our Liberated Stock Trader PRO Stock Market Training Course.