Are We Sitting on a Market Crash?

It’s Written in the Stars, Apparently!

The word “crash” has been doing the rounds in the finance world since a few month in face of what appears to be a raging bull smashing one all-time-high (ATH) after another despite, and arguably due to, the troubles of the world with the pandemic still alive and kicking, and with many sectors fiercely hit by the lockdowns. This overconsumption of the word by itself should be unnerving because it is a clear indicator of worried investors and that a massive sell-off is just waiting at the door, ready to answer the first clear sign of a bear: when the majority will resort to taking profits or cutting losses, and the prices rapidly go down with double-digit percentages, similar to what happened to the Crypto markets a couple of weeks ago.

In this state of what seems to be like paranoia, each time the market (especially NASDAQ) stumbles a bit, people start to ask whether it is the big one. Yet, no body exactly knows what is the big one and how big it would be. Luckily, we don’t need to resort to the horoscope to estimate an answer, as we have the tools of the trade (pun intended) to do so.

Analyzing many graphs across many time frames, and comparing to previous crashes, I was able to identify several red signals which indicate a crash around the corner. Let’s break down some of them:

US30, US100, and US500 correlations with Crypto currencies.
This is rather a new phenomenon that started in the end of 2019. Whenever the stocks market goes up or down, the Crypto currencies echo such a movement eventually, but rather with higher amplitudes. Looking into it with more details reveal that sometimes it was the other way around where the Crypto market dragged the stocks one. This hasn’t happened with the latest Crypto crash…yet. The reason for the correlation is most probably the rise of retail investment and this still exists, even though volumes are decreasing as lockdowns are being eased, which feeds further into the market decline.

US100 lower weekly Bollinger Band
In each crash since the dot-com bust, and only in the event of such crashes, the lower Bollinger Band was touched or surpassed. We were half way there (judging from the median line) in the second and third weeks of May. Currently, US100 is a bit above the median but there’s a major squeeze in the hourly chart. Would it go further up? The stars don’t seem to be aligned for that.

Something is brewing in the stocks
Looking at many stocks, there are indicators of an imminent major change, regardless of the direction. This is due to the flattening in the past few weeks. With flattening, comes tension; and tension eventually causes displacement. All major players are already overvalued and we have already seen Tesla and Amazon, the once best performers of the post-COVID19 market saturating.

Fibonacci
It’s no secret that the market follows the Fibonacci sequence religiously. Just pick any retracement tool for any graph and you would easily find the areas of support and resistance falling on each of the Fibonacci levels (there are even automated tools for that). Currently, we are at a major retracement level of the post-COVID19 trend, and we are already experiencing friction. If no crash happens at this stage, this means we would need to wait a few more month and prices should get at least between 10% and 20% increase. As we have seen with Bitcoin, the bigger you get the harder you fall. It might be better for the market to crash now with a major correction than later.

Foreign Exchange (FOREX)
While this market is not directly related to crashes, the currency-pair dynamics are largely affected by it. Mainly, CHF and JPY catch major gains during the first days of turmoils, and looking at the charts, the indicator seems to favor a major change in the near future. This is very clear analyzing the ranges of GBP/CHF.

Aesthetic Analysis
Last but not least, my favorite tool is an analysis methodology I have developed out of a mix of tools while analyzing different charts during the past few months. It’s a mixture of harmonic patterns, trend analysis, and visual arts. By applying geometric figures like trend lines, curves, and Fibonacci spirals to the chart, I define points of tension and centers of gravity to understand the behavior of a trend. Moreover, through using concepts of symmetry and detecting repetitive patterns, I estimate the future movements that would increase the overall harmony of the graph based on the Golden Rule. Applied to US30, this method strongly indicates a crash in the coming weeks since it shows that we have reached the peak of the current uptrend. If a crash doesn’t come, the harmony of of the US30 monthly graph would become too complex to be achieved except if the market keeps expanding further with the same pace in the coming month, which is rather unlikely. Hence, looking at the fundamental analysis as well as using Occam’s Razor to filter out complex solutions to the harmony problem, one could theoretically predict the time of the crash.

At this point,some could ask what is a market crash exactly, to which the answer would be the ever boring “it depends.” I would leave the financial jargon to fundamental analysts, but what’s important for me is how to define a crash based on price movement. For this, one should only look at history. As mentioned before, the lower weekly Bollinger Band was the historical indicator of a crash for US100 (NASDAQ). For US30 (DowJones Industrual Average), that might be a bit different because it is less volatile. However, since the lower Bollinger Band is just another name of the lower bound standard deviation, it must be a good indicator of the significance of a market correction, provided that it wasn’t touched before during the bullish trend. If it were touched before, then we would probably be in the post-crash flat period (akin to US30 during 2018 until August 2019) or even the start of a bear market.

Every bubble is bound to burst and whatever comes up would eventually come down. That applies to Capitalism as a whole, but for now, it’s the gains in the smaller market of stocks which are at imminent stake. Of course, as long as Capitalism’s bubble is still expanding, the stocks market would eventually create a new bubble after each crash. We just need to keep in our mind that the bigger the bubble is, the harder the crash will be. Just look at the state environment around us; we don’t need a graph for that.

Even if my prediction is wrong in the short term, it won’t be long until we start counting the losses. Crashes are part of the system after all, aren’t they?!

Source: https://medium.com/bearamid/are-we-sitting-on-a-market-crash-cc34acb50ef0?source=rss——-8—————–cryptocurrency