“The stock market is on the verge of collapsing.” “That was the last bright spot we saw.” “The Nifty is reverting to 8,000.” Since the Nifty 50 crossed the 14,000 level, we’ve been hearing a lot of doom and gloom, and there doesn’t appear to be any signs of weakening that may pull our heavyweight index to 8,000 or 10,000, for that matter. But, you know, every celebration has to come to an end, right? This will be the same. But when is it going to arrive? What will be the length of it? You’re not aware of this. Fearing variables such as PE being too high, midcaps running, and FIIs selling, a large portion of regular investors have been missing out on the market rally. But does this all point to a stock market crash?
We hold a different viewpoint. In today’s piece, we’ll talk about how to predict a stock market crash and how to thrive even if a bear market hits our markets. However, first…
What Is The Definition Of A Stock Market Crash?
The first sign of a bear market is usually a stock market drop. It’s a sharp drop in stock prices, which might drop by 25 to 50 percent in a few of weeks. One thing is evident from this definition of a stock market crash: a five to ten percent drop in the price of any index is not a crash. It’s merely a market correction, which is beneficial.
How Can You Predict A Stock Market Crash Before It Happens?
Even though stock market crashes are unavoidable, learning to recognise the clues that Mr. Market throws your way can help you save money and profit on time.
For example, consider all of the stock market crashes that have ever occurred in the Indian Stock Market.
We searched up Indian stock market collapses on Wikipedia, which offers a complete list. Now, if you pick any stock market crash at random, you’ll notice a price action pattern developing, and the pattern always plays out after a breakdown and a retracement.
Let’s start with the most recent stock market crisis in 2020, which occurred when the Covid-19 became a global issue.
Nifty created a clear bearish pattern, a rising wedge pattern, long before the Covid-19 appeared on our news channels. The Indian Index was trading in a rising wedge formation, and a correction or possibly a more thunderous crash was expected on the day it broke down. When it retraced its breakdown point and began plunging again, we had confirmation.
Most merchants would not have seen their portfolio wipe away more than fifty to sixty percent of their returns if they had recorded profits at the retracement point. But, being retail dealers, they were hoping for something miraculous to happen. People began dumping all of their assets in back-to-back lower circuits as soon as the pandemic news became public.
On the weekly chart, the index was also trading in a rising channel, a bearish pattern if broken on the downside.
So, if you look at the big picture, you can see indicators of a recession or a pandemic before it happens. If you know price action like the back of your hand, you’ll be able to read these indicators. Begin to understand the final price action…
Another meltdown in Indian stock market history occurred on May 17, 2004, when the election results were revealed and UPA 1 was elected to power.
Some would argue that it was a news aspect because BSE dropped more than 25% in a week, but it was not. When the election results were announced, the crash was already in the works.
Take a look at the graph from that time period.
On the daily chart of the BSE SENSEX index, we can see that the index has formed a double top pattern, which is a bearish pattern.
If we look a little closer, we can see a head and shoulders bearish pattern forming. The target was built in the textbook manner, with a conventional head and shoulder pattern. When a trader analyses head and shoulder patterns, he or she understands that the breakdown target is always the height of the head. Examine the sample below and evaluate if the crashes are caused by news or by price activity.
The target or first stop was set once the breakdown occurred.
Nobody can teach you how to predict accidents better than you. You’d have to study charts, become acclimated to practising price action on a daily basis, and perfect your skills through trial and error. Before you start practising, you should spend some time learning about the charts and their patterns, as well as the importance of proper execution.
You must also be prepared for the bear market now that you have a thorough understanding of how to predict a crash before it occurs.
How Can You Survive In A Bear Market?
Will you be able to profit from the crash if you predicted it ahead of time and it happens? Not until you’ve read this part.
Never, ever, ever buy the first rally in a bad market. Sellers are likely waiting for the stock or index to retrace and then sell it higher. You don’t have to catch the knife as it falls.
—- Always wait for a stock or an index to reach its lowest point. If there is no substantial price action or candlestick pattern that confirms reversals, don’t buy. If you want to be long, look for dojis, or bullish engulfing candles.
—- In a bear market, constantly keep an eye on the market. What exactly does this imply? It suggests that you should always sell when the market is rising. Look for patterns like head and shoulders, rising channel, inverted flag, and pole, among others, to buy the dip when the time is appropriate.
—- Never buy naked options in a bear market, no matter how promising a stock appears to be, in a short uptrend swing, until you have enough experience sorting out the options greeks.
People make money in the bull market, but they make a fortune in the bad market, as they rightly say. When you get the opportunity, go for the undervalued diamonds. Within a year of the Covid-19 fall, companies like Reliance, Asian Paints, HDFC Bank, Infosys, and TCS had nearly doubled or more than doubled in value.
The bottom line is that when a bear market ends, the bottom is made someplace. If you want to be a profitable and knowledgeable market player, you must catch the bottom, foresee the crash, and take all necessary steps.