How To Avoid A Stock Market Crash Like 1987 and 1929

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How To Avoid A Stock Market Crash Like 1987 and 1929

If there is anything that strikes fear into the hearts of stock market investors, it is a major stock market crash.

In fact, we have heard many tales of how 1987 and 1929 wiped out the entire wealth of many investors and traders in the stock market, and how it happened quickly and without warning.  But did it really creep up on us?  Or could we have been well prepared?  In this article I am going to show you a simple method for being aware that a stock market crash is about to happen, and how to avoid it.

You see, in both cases of a major stock market crash like 1987 or 1929 there are a few facts that we need to be aware of, so we can look out for them in the future:

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.

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 happens.

If we look at the price action I’ve just described on a price chart, it looks like a zig zag downwards.  In fact, Charles Dow coined this phenomenon as his own back in the late 1800s – a theory that is now known as Dow Theory.  Watch the video below as I demonstrate how to use this in real life and over history:

So far this is simple enough, right?  But will a stock market crash happen every time we get a zig zag down in price?  The simple answer is no.  If we had a crash every time, we would have had hundreds of crashes in the last century alone. 

But Dow Theory will give you fair warning of a bear market also – in fact the same action occurred in 2007 – long before the “experts” were calling an actual bear market or recession.  Sometimes the down move will be severe like 1987 or 1929, sometimes it will be prolonged like in 2008, and sometimes it will simply reverse again and resume an uptrend.

Overall, the probability is high though, at around 70%.

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.

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February 7, 2010  Tags: , , , , ,   Posted in: Articles On Building Wealth

5 Responses

  1. How To Avoid A Stock Market Crash Like 1987 or 1929 | Articles Bliss - March 25, 2010

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