Lessons from the Pros


How To Take Advantage of a Stock Market Crash and Trade Profitably

Question:  When will the market fall?

Answer: Focus on what’s real, not what you feel. While there are many signs pointing to a severe market crash, Fearing a stock market crash without knowing what the warning signs are or what they mean is fruitless. In fact, fearing a stock market crash at all is fruitless as that fear won’t help you protect your investments. Instead, put your energy into learning how to read the markets and implement proven strategies that can help you not only protect your investments but take advantage of drops in the market.

Warning Signs that a Stock Market Crash is Imminent

  • Consumer confidence is the highest it has been in 18 years (where it was right before the 2000 market crash)
  • There are a record number of short positions in the 10 and 30 year treasuries
  • There are a record number of short positions in Gold
  • The debt to GDP ratios are the largest they’ve been in decades for major G-10 countries
  • We are seeing a flattening to inverted yield curve

Free Trading WorkshopThere are other indications of an imminent stock market drop as well. For example, some of the worst market declines in history were preceded by lower-than-average volatility, stronger-than-average earnings, strong GDP growth and bullish sentiment — 1929, 1987, 2000 and 2007. However, all these indications shouldn’t trigger an automatic selloff of your market positions.

What I have learned, lived through, profited from over my 20+ years trading and managing money in the markets is to focus on what is real, not what I feel. While the fundamentals are suggesting a downturn in stock prices is coming but, typically, the market will go up another 5 – 10% before falling. This means fundamentals don’t offer much help with respect to timing the market’s turning points. While there is no doubt in my mind a market down turn is coming, I and those in my live trading sessions will wait for the real trigger to tell us when to take action, action we will be prepared for.

Know the Signs of a Bear Market on the Charts

This trading chart shows fresh supply and demand zones.

The chart above is a daily chart of the S&P 500 as of today, 8/29/18. Areas marked (A), (B), and (C) are demand zones. A and C are fresh demand zones. B is a demand zone where we were buyers when price returned to it so it’s not fresh any longer. Area A, however, is a fresh demand zone. So, when price revisits it, we will again be buyers as we have the entire rally. However, once price revisits one of our demand zone, A (or another), and goes through it, that will be the market telling us objectively that it has reached a level, or price point, where supply exceeds demand. Then and only then will we stop buying and, instead, go into protection mode, sell short mode, and get ready to buy a bottom mode. This is certainly not the first time this has happened, and it won’t be the last.

Don’t Panic When Stocks Drop

Back in 2008, the market experienced one of the biggest crashes in history. As you can see below in a live online trading session I was delivering for members, price came right down into a fresh demand zone on the monthly chart (a gift of a life time!). Notice, however, how horrible the news was; and that news was very real. The severity of the negative news is what caused the masses to sell stock because that’s simply what people do. However, as bad and real as the economy was, price was at demand with a massive profit zone to the upside. We followed our non-emotional simple rules, bought, and the market has gone up ever since that 2009 low.

Stock chart of the 2008 market crash.

Everyone talks about a market crash; when they do, they mean a crash to the downside. No one ever talks about the biggest market crashes of all, the ones to the upside. These dwarf the occasional down turn in a market so we don’t want to miss them. As I have said so many times… the equity index markets are designed to go up over time for many reasons. By following simple rules, you can make this next market crash to the downside, and the one that follows to the upside, market moves that don’t hurt you but instead allow you to enjoy huge profits. This is all with the goal of making enough money to live the life you choose.

Sam Seiden – sseiden@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.