STOCK MARKET CRASHES – HOW TO ANTICIPATE THEM? HOW TO THRIVE IN A BEAR MARKET?

“The market’s about to crash.” “That was the last upside that we have seen.” “Nifty is going back to 8,000.” We have been hearing such pessimistic things since Nifty 50 has crossed the 14,000 mark, and right now, there doesn’t seem to be a sign of any weakness that can take our heavyweight index to 8,000 or 10,000, for that matter. But every party comes to an end, right? And so will this. But when will it arrive? How will it span out? This, you don’t know. A significant chunk of retail investors have been missing out on the market rally, fearing the factors like – PE is too high, midcaps are running, FIIs are selling. But do all these indicate a stock market crash? We have a different opinion. Today’s post will discuss how you can anticipate a stock market crash and how you can thrive even in a bear market if it comes upon our markets. But first… 

What Is A Stock Market Crash?

A stock market crash is often the first sight of a bear market. It’s a sudden decline in stock prices, which may fall to 25 – 50% in a brief time, say a couple of weeks or so. From this definition of a stock market crash – one thing is clear – a five to ten percent decline in the prices of any index is not a crash. It is just a correction, which is healthy for the market. 

Now that you know what a stock market crash is, here’s a way to anticipate them beforehand, save your capital, book your profit at the time, and thrive in a bear market. 

How To Anticipate A Stock Market Crash Beforehand? 

So much so inevitable a stock market crashes are, you can save your capital and book timely profits if you learn how to read the signs that Mr. Market sends your way. 

For instance, first, let’s look at all the stock market crashes that ever happened in the Indian Stock Market. 

We looked up Indian Stock Market crashes in India, and Wikipedia has the list of all of them. Now, if you randomly take up any stock market crash, there is a price action pattern in the making, and the pattern always plays out after a breakdown and a retracement. 

For clarity, let’s take up the latest 2020 crash in the stock market after the Covid-19 became a global problem.

Long before the Covid-19 arrived on our news channels, Nifty made a clear cut bearish pattern, a rising wedge pattern. The Indian Index was trading into a rising wedge pattern, and the day it gave the breakdown, a correction, or even a more resounding crash was anticipated. We got the confirmation when it retraced its breakdown point and started falling again. 

Now at the retracement point, if most retailers would’ve booked profits, then they would not have seen their portfolio wipe out more than fifty to sixty percent of their returns. But retail traders being retail traders, were waiting for something magical to happen. Soon, the pandemic news took everyone by surprise, and people started offloading all their holdings in back-to-back lower circuits. 

The index was also trading in a rising channel on the weekly chart, a bearish pattern if broken on the downside. 

So if you take a macro look, there are signs beforehand of any recession news or pandemic news. One can understand these signs if they know price action like the back of their hands. Start to learn the ultimate price action…

If we look at another crash in the Indian Stock Market history, we find a crash on 17th May 2004, when the election results were announced and UPA 1 came to power. 

Now some might say that it was a news element, and BSE fell more than 25% in a matter of a week, but it was not. The crash was in the making long back when the election results were announced. 

Here’s a look at the chart of that time. 

If we see the daily chart of the BSE SENSEX index, the index made a double top pattern, which is a significant bearish pattern. 

If we dwell deeper, we also find a head and shoulder bearish pattern in the making. A typical head and shoulder pattern was formed, and the target was as per the textbook pattern. When a trader studies head and shoulder patterns, they know that the breakdown target of a head and shoulder pattern is always the height of the head. See the example below and decide for yourself if crashes are news-based or price action-based. 

Once the breakdown occurred, the target or first stop was predefined.

If you want to get better at anticipating crashes, no one can teach that to you. You would have to see charts, get used to practicing price action daily, and get perfect by hit and trial. Before practicing it you must put your time to learn the charts and its patterns and also more on the significance of right execution.

Now that you have completely understood how to anticipate a crash before it happens, you also need to be ready for the bear market. 

How To Thrive In The Bear Market?

Suppose that you have anticipated the crash beforehand, and now the crash is here, will you be able to make money out of it? Not before you give this section a read. 

When you are in a bear market, don’t buy the first rise, ever. You know sellers are waiting for the stock or index to retrace back and sell it higher. You need not catch the falling knife.

   —-     Always let the stock or an index bottom out. Don’t buy without any significant price action or candlestick pattern that confirms reversals. Look out for dojis, bullish engulfing candles if you want to be on the long side.

   —-     While in the bear market, always follow the market. What does this mean? It means to always sell on the rise. You may not buy the dip until the right opportunity arrives, look for patterns like head and shoulder, rising channel, inverted flag, and pole, etc.

   —-     If you are in a bear market, however promising a stock looks, in a short uptrend swing, never buy any naked options until you enough experience in sorting out the options greeks.

   —-     They say it justly – people make money in the bull market, but they make a fortune in the bear market. Pick up the undervalued gems whenever you can. Heavyweights like Reliance, Asian Paints, HDFC Bank, Infosys, and TCS have almost doubled or more than doubled within a year after the Covid-19 crash came by.

Bottom Line

So the bottom line is, the bottom is made somewhere when the bear market ends. You need to catch that bottom, anticipate the crash, and do all the needful if you want to be a profitable and learned market participant. Today’s post was all about that. In fact, it was just the tip of an iceberg of the knowledge that our trading mentors have at Trading Cafe India. Want to learn all those things? You can always join our Mentorship Program. 

Published
Categorized as Blogs

Leave a comment

Your email address will not be published.