- It is impossible to predict a market crash.
- Technical analysis needs to be interpreted against catalysts.
- Focus on the largest Tech stocks for clues regarding the market direction.
No, you cannot predict a market crash, and this article demonstrates the absurdity of the idea. Even the Street.com's headline "How to protect yourself from a 15% correction in the Stock Market," is after the fact analysis. There is no way to know when it will happen. It is like asking the now defunct company, Polaroid, how it could have protected itself from disruption of the digital camera.
These market crash predictions amount to nothing more than fear mongering. Don't get me wrong, chart patterns are not bad, but using armageddon language is bad because a market drop is just a drop.
So, I am definitely sure that all of the doom and gloom prognosticators have never read the book titled "Technical Analysis Of Stock Trends" by the founding father of technical analysis, John Magee. I believe it was Magee who stated that one should not try to predict but basically go with the ebb and flow of the market. Projections are there to give you a heads up, but you should not be sounding worthless alarm bells. (See also: Predicting Pullbacks In Berkshire Hathaway Inc. Stock Using The VIX)
When I look at these charts (I will post a few of them below) that analysts show for proof, alarm bells go off in my head.
There are so many things absurd with this analysis. I go over a few of them below.
First off, in technical analysis 101, breaks in trendlines do not mean a thing. Just look at how many false breakouts have you gotten whipped around on? You need to look at catalysts, only then will a chart pattern play out. Also, the trend changes with the market as I have drawn. In no shape or form can you call a crash, you are just looking at probable areas. Now, the charts are representative of catalysts. If the catalysts are good, it will be reflected in the charts.
Second, looking at a gap down of a 30-minute chart shown above, you cannot claim the crash may have started and use individual stocks with daily timeframes as proof. It comes across as data-mining, where you are trying to find significant information when it does not exist.
Third, lower time frames have more noise than higher time frames. If you have day traded before, this statement will hit home. Longer time frames have less noise. This is why I am surprised that a Wall-Street analyst would make such a basic blunder using an intraday chart as proof of a potential drop.
What to focus on
What is the market? It is a basket of stocks. So, focus on the stocks that have been keeping the market up. The market is not some mystical force like the pundits make it out to be. Here are a few of the major tech stocks that are preventing the market from falling: Apple Inc. (NSDQ:AAPL), Microsoft (NSDQ:MSFT), and Amazon.com (NSDQ:AMZN). In addition, these stocks are among the top 5 stocks by market capitalization. These are your indicator stocks. The idea is to keep it extremely simple. (See also: 3 Hidden Growth Catalysts For Apple Inc. Stock)
What is the direction of Amazon, Microsoft, and Apple? Up.
(Source: Yahoo Finance)
(Source: Yahoo Finance)
Source: Yahoo Finance
Now there is a very simple interpretation. Don't over complicate it. These stocks are above their 20 day, 50 day, and 200 day moving averages. To a normal person, this indicates a strong uptrend. Now, the catalysts for these stocks will be the earnings that come out in the coming weeks, not just the earnings for these stocks. Because, these companies are linked to other companies due to their network alliances. So,expect to see sympathetic moves based on firm and industry level perception. Thus, if the firms associated with these companies and the overall industry report bad earnings, it will be a catalyst that would indicate a temporary drop in the market otherwise it will be difficult for the market to fall.
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