Here’s Why a 20%–40% Stock Market Crash Could Be Ahead
Mark my words, the next stock market crash could be very severe. The key stock indices could fall immensely. It wouldn’t be shocking to see losses of more than 20%–40%.
Looking at the key stock indices, it may not seem like a stock market crash could even be close. We are seeing robust moves to the upside and investor sentiment is very bullish these days. But complacency is very dangerous. Remember, in times when everyone else wants to buy, it’s time to pause and reflect.
Advertisement
One Technical Analysis Indicator That Investors Must Watch
With this said, please look at the long-term chart below of the Dow Jones Industrial Average (DJIA). There’s something happening on the charts, and it’s not getting a lot of attention. Mind you, this is something we see in other indices as well.
Chart courtesy of StockCharts.com
Pay attention to the bottom of the chart, where the relative strength index (RSI) is plotted. This is essentially a momentum indicator. When RSI crosses above the 70 level, technical analysts say the asset is “overbought.” Currently, the RSI of the DJIA stands above 82.00.
How significant is this?
There have been only two instances in the last 50 years when the RSI has been at or above 82.00! It happened once in 1986 and another time between 1996 and 1997. What happened after both of these instances? Initially, we saw the market soar very quickly. Solid gains followed.
In 1986, the DJIA jumped by more than 22%. But, in 1987, a massive stock market crash occurred. Between 1996 and 1997, there was a solid run to the upside. Then, between April and December 1998, we saw a decline by more than 20%.
Stocks later bounced back from that decline, but, starting in 2000, we saw losses again. Between 2000 and 2003, the DJIA dropped by almost 40%.
Stock Market Outlook: Stocks Setting Up to Drop?
Here’s the big question: Is the RSI predicting a stock market crash ahead?
Dear reader, it can’t be stressed enough: the momentum and complacency on the market is severe. It will not be shocking to see a melt-up; there’s strong evidence of it. As said over and over in these pages, trying to predict tops in this market could be a very dangerous game.
I question how long this can go on. Could the key stock indices continue to run at the same pace as they have been since 2009? I believe that, before we see the stock markets double, we could see a rigorous stock market crash that catches investors by surprise. A 1987-, 2000-, or 2003-style stock market crash could be possible.
