“The first rule of forecasting should be that the unforeseen keeps making the future unforeseeable.”
So I promise my old group of traders friend if I perceive the stock market is coming to a crash, I will share it and let them know.
Early of this year I have forecast this year June will be the timing that the stock market suffer a heavy crash from the peak. To be honest the direction of the market is unpredictable, I am anticipate a straight downtrend with a lower low and lower high to be formed but well, who can time the market correctly. In contrast, after the market for example S&P 500 suffer a plunge early this year, it bounce back and recover all the losses to 2100 area.
Where is lower low and lower high? Nope, can’t be seen at all, we only can see that the stock market is undergo consolidation.
Is it distribution? Or is it accumulation phase…no one will know at this current moment except those big players who are still in the game. One thing for sure if we based on the historical chart, a stock crash normally come to a common ground that:
- The stock indices can’t make a new high.
- Time bomb event explode and market players unable to anticipate it and react upon it
- Oil price as a leading indicator.
I will briefly explain the 3 points below. Firstly let us look at the chart below with monthly as the time frame. Circle in green symbolize the peak, circle in black symbolize the bottom. The orange line is S&P 500 chart, the candlestick red/green is WTI crude oil chart.
1.The stock indices can’t make a new high.
When you are able to see this pattern in the chart in monthly time frame, why monthly time frame this is due to monthly time frame give us a depth information as it take a great impact and clear direction to be formed in monthly time frame (filter out small movement and noise).
When the indices unable to move higher it is hinting that the market has reached a point where supply is more than demand and where the price reaching stagnation. To move higher, the demand need to be greater than the supply which now has formed so call resistance to block the price moving higher. When the demand is unable to cope with supply, more traders and investors will start selling and realize profit as no one want to hold on a position that can’t appreciate further. This create a mass selling and the market start to reverse and goes bearish where the excess supply start to drive down the price to meet the demand and trigger further selling from all the traders and investors who want to realize their long position. In contrast, short seller also start to come in to take the ideal short position which create mass selling situation.
If you check historical event where the market start reverse and plunge heavily normally there is some rumors and news circulating before real event come true and buyers start become picky and seeking to buy equities in a discounted price. This create “Shortage of demand” which leading indices stagnant and unable to create a new high.
There is another saying that the Financial Institution players are trying to exit the market by creating a consolidation-distribution phase which left a mark at the chart too. Normally they are the one receive the important news first.
Currently we can see from S&P 500 and other major indices that they are unable to move to a new high where traders and investors start choose to buy at weakness and sell at strength.
Is it time for a major reverse? Market is listening and waiting for the time bomb.
2. Time bomb event explode and market players unable to anticipate it and react upon it
This is classic. When there is a major event happen where major players didn’t anticipate, this will create panic selling which drive down the market. For example, imagine you are at a higher storey building and it is on fire, what will happen? Everyone is rushing to an exit at the same time because everyone is panic!
Same situation happen every market cycle where there will be a historical event which normally created by a financial institution but they are too big to fail and cause the market being drive down by panic selling.
What is time bomb event for this time? So far seem peaceful but is it the calm before the storm? Time will tell.
3. Oil price as a leading indicator.
If we observe closely we can know that oil price and indices sometime has correlation especially this past few years. In a way is normal as stock market consist of energy sector which those big company is in the basket of indices.
What is more interesting if we compare the chart is that the oil price is like a leading indicator to show the market crash signal. Everytime when the oil price crash to a new low and start to ride a uptrend, the next few months stock market will undergo a heavy crash.
Is it coincidence? Let me try to bring in some logical sense for the reasoning behind. Few factors to build up to this. First of all is that there is an event that major players unable to anticipate at that period of time. Secondly, when oil price start on the bullish trend, most traders and investors will won’t want to miss the “BIG PARTY”. They also want to profit from the ride also. This create stock market a “Heavy shortage of Demand”, which is easily drive down the market to the low point until it find its demand and buyer.
Currently oil seem like bottom and trying to break $50 and riding to $60. As market digest all the negative news and a lot of big players try to collect position and form into their portfolio. If there are positive news come in, big players are most welcome to drive the price to a new high.
Stock market? By that time I guess buyer will become picky and people will stay away from it for few months until the price is too good to be miss or oil commodities is too expensive to invest and they would like to switch attention.
Currently the market undergo a point where make it or break it, the market is waiting at the resistance (I believe create by the big players) and anticipate the FOMC decision to raise hike or postpone. As there is no major bad news currently, it is not a surprise if the indices create a new high with short seller being short squeeze and cover their position.
On another hand, if the rate hike plus there are other negative factors coming in, the market is most welcome to plunge to new low. If time bomb event announce at current moment, I guess market is full of short seller who queuing to short like there is no tomorrow. Plunge 50% from the peak, I will say not hard to achieve.
I will still maintain my forecast that the market crash will happen on June but whether I am right or wrong, time will tell. But I am getting ready physically and mentally to join the fun if there is a plot twist happening soon.
Till then, happy investing and trading 🙂
**At the point of writing I never include Brexit factor which turn out to be the key factor that lead to unexpected event