“It’s all hype…” “It’s clickbait…” “It’s fearmongering…”
That’s just some of what folks said about my prediction last year that the stock market would crash.
I can’t blame them for being skeptical. After all, the financial industry is full of folks who make scary predictions just to capture headlines and get their “15 minutes of fame.”
But, what if I’m not one of those people?
What if I’m just a guy who has been following the financial markets for nearly four decades?
What if I’ve made plenty of bold calls – many of which have been dead-on accurate?
And what if, when I made that call, I noticed that many conditions in the stock market were eerily similar to conditions that preceded bear markets before?
Folks… that’s not fearmongering. That’s just suggesting, as the storm clouds build in the distance, that you might want to carry an umbrella.
And I hope you listened. Because the market, of course, did crash. And it was even uglier than I anticipated…
Let me show you the main thing that tipped me off back then.
Take a look at this monthly chart of the S&P 500 plotted along with its 20-month exponential moving average (EMA)…
My longtime readers know I use this chart to define bull and bear markets.
If the S&P 500 is trading above its 20-month EMA, stocks are in a bull market. If the index is trading below the line, the bear is in charge.
Some examples of when that line was breached to the downside, and foretold a bear market, are marked by red arrows above.
As we can see, that 20-month EMA line was broken at the beginning of March. So, the bear market is on.
But we had several clues to suggest this would happen, well in advance.
The Moving Average Convergence Divergence (MACD) indicator at the bottom of the chart provided one of the early warning signs of a bear market.
Without getting too complicated, if the black MACD line is trading above the red line, stocks are in a bull market. When the black line crosses below the red line, traders need to be on the lookout for the bear.
Notice how in 2000 and 2007, the MACD indicator gave us that “bearish cross” from extremely overbought conditions (the red circles on the above chart). In both cases, the S&P 500 dropped into a bear market a few months later.
It’s these two indicators, working together, that paint the clearest picture of an imminent bear market.
That’s why the market didn’t crash when the S&P 500 dropped below its 20-month EMA in 2010 and 2011 (the green arrows on the chart).
In both of those situations, the MACD was more neutral than overbought. There wasn’t a bearish cross in 2010. And in 2011, the bearish cross reversed before the end of the year.
So, we didn’t have the conditions necessary for a bear market back then.
But in October 2019, the storm clouds looked a little more ominous. The MACD indicator had already completed a bearish cross in November 2018. And, it never made a strong reversal as it did in 2011.
Instead, the black and red lines stuck together. The bullish momentum never returned. And that was another significant warning sign.
Of course, the stock market did recover from the December 2018 breakdown. And, the S&P 500 did manage to make a new all-time high in July.
But, that action created negative divergence on both the MACD and Relative Strength Index (RSI) indicators – marked by the blue lines on the chart.
Negative divergence – when a chart makes a higher high, but an indicator makes a lower high (shown by the blue lines above) – tells us that the momentum behind the rally is waning.
It’s a sign of a potential change in trend from a bull market to a bear market.
So, we had multiple “bearish crosses” on the MACD… and negative divergence on the MACD and RSI… and we had a breach of the 20-month EMA.
If you’re looking for clear proof that we’ve entered a bear market, you could do a lot worse.
If you’re looking for more proof, though, I share a few other reasons in a special presentation I recorded recently (click here to watch it).
Best regards and good trading,
Editor, Jeff Clark’s Market Minute
P.S. The bear market is here. There’s no denying it.
It’ll be a scary time for most everyday folks who own stocks. Long-term investors who aren’t prepared (and that’s most of them) could soon lose a lot of money…
But not traders. Traders don’t fear market crashes. In fact, we get excited about them. As scary as they seem, they can be a goldmine for trading profits…
I urge you to take a look at what I have to say about this crash. It could mean the difference between losing everything you’ve built up, or actually making massive profits, as the bear market transpires. Just click here to get the full story.
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