By CCN Markets: The stock market is at its third most expensive valuation in history. The market’s overall valuation, as measured by the S&P 500, is approximately twice that of the long-term average.
Between that, and the inverted yield curve signaling a possible recession, investors sold off the market in a big way on Wednesday.
This could signal the beginning of a stock market crash that could take the indices down by 50 percent or more.
Moving Averages Tell the Stock Market’s Story
Fortunately, investors have a few critical signals that may indicate when the big drop is about to begin. While they aren’t foolproof, they provide a windsock that can allow investors to set up short positions to hedge their portfolio.
When we look at daily and weekly charts of any stock or index, we can overlay two important lines that show critical levels of price support or resistance.
Daily charts will have a 50-day moving average and 200-day moving average. As their names imply, each day a data point is added that represents the average price of the index over the past 50 or 200 days.
When we put all the points together, we get a wiggly line. That becomes our 50-day or 200-day moving average.
The same is true for a weekly chart. We can have a 50 and 200-week moving average, which obviously shows the longer-term averages of any given index.
It’s All About Investor Psychology
These lines are important because they indicate widespread investor psychology.
If stocks are falling, and the indices breach any of these moving averages, those tend to be negative signals for future stock prices.
When daily moving averages are breached, the negative price movement will likely be short-term in nature, and weekly moving average breaches indicate longer-term trends.
Some traders will open up a short position when the 50-day or 50-week average is breached, but a breach of the 200-day or 200-week average is often indicative of a very serious decline that will continue.
Critical Levels to Watch to Predict a Stock Market Crash
For the SPDR S&P 500 ETF – which acts as a direct proxy for the S&P 500 index – the 200-day moving average (DMA) and the 50-week moving average (WMA) are both around 277.
A breach of 277 is a major crash signal.
The Dow Jones Industrial Average and NASDAQ 100 ETFs both have the same 200-day and 50-week moving average patterns.
The Dow Jones ETF is sitting right on the line at 255.
The NASDAQ 100 is approaching the critical 175 level.
These are the levels, if breached, that may signal that the big stock market crash is upon us.
Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.
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