Prepping for a crash - Practical trading roadmap.
All crashes are similar, only perceptions change.
Crashes all generally group into three stages:
A slow slanting sell-off. The upper 1/3 of the crash. During this there are many rallies. The market is going down but it's not "Crashing". In this time there's a lot of debate as to whether or not the market will crash and being persistently bullish or bearish can feel equally as punishing.
I call this the "Fright" phase of a the crash.
Next there's the break. I've found in almost all crashes (Not only in stocks but in Forex, crypto - anything) the key signal of a break has been the 161 extension of a topping swing breaking. It's been a very good historical signal. After the break we head into a strong sell off where all day/week candles close lower and do not trade over the previous candle. This is the memorable part of the crash. Capitulation. It's always supported by news.
I call this the "Terror" phase of the crash.
The third phase of the crash has multiple strong rallies. Sharp and aggressive sell-offs and then more strong rallies. Ultimately the market just ranges. This is easy to see after the fact but during it things always feel like some big break is coming. Eventually (Off a strong rally) a big sharp bear break is made. Usually news supported. Very scary because it's fast and it's taking out the lows that looked like they'd hold (Didn't break for a long time in the range) and then this is the final big move of the crash. It will be really scary and it will be the low (At least for a considerable time/price move).
I call this the "Despair" section of the crash.
The "Fright" section of a crash is hard to call a crash starting in. During the final 1/8 of a bull run there will be multiple times the market does things that look like we're in the "Fright" stage. But the "Terror" stage is much harder to mis forecast. The rule of a 161 from the topping swing breaking does not flag up a lot of false signals. Check this - look at the SPX false bear signals from 2015 onward and you'll see none of these broke the topping swing 161. All closed a month above that (Some wicked, like March 2020).
The only previous example you'll find in SPX big charts of the 161 break signal was in 2008 and 2000. In which they were clearly big inflection points. While the things that happen in the "Fright" phase can be a bit different from crash to crash, what happens in the terror phase is remarkably consistent. The above trade plan lays out what I think would be the most important things to note when it comes to practically trading inside of a crash if a crash happened to form in a similar way to previous crashes.
3900 would probably retest (Maybe a low somewhere around 3815 - under 3800 I might sell bear breaks). It's probably best to wait for this.
From 3900 we'd usually see a big bear day taking out the low of the big bull candles to retest 3900.
The lows of these candles would then be retested (But reject from the lows).
The retest of 3900 and then the second lower retest would be optimal points to position. Stop would be 3966 (Would be tighter with PA).
Upon rejecting the retest, the market takes on a clear property of not trading above the high of the last day and closing lower.
A string of this these days would persist to somewhere just under 3100.
After 3100 hitting we'd still have lower to go but it'd get choppier. The easy short is over.
Big sharp rallies can be shorted after this targeting 2550 (More specifics on that at the time if we get there).
Crashes all generally group into three stages:
A slow slanting sell-off. The upper 1/3 of the crash. During this there are many rallies. The market is going down but it's not "Crashing". In this time there's a lot of debate as to whether or not the market will crash and being persistently bullish or bearish can feel equally as punishing.
I call this the "Fright" phase of a the crash.
Next there's the break. I've found in almost all crashes (Not only in stocks but in Forex, crypto - anything) the key signal of a break has been the 161 extension of a topping swing breaking. It's been a very good historical signal. After the break we head into a strong sell off where all day/week candles close lower and do not trade over the previous candle. This is the memorable part of the crash. Capitulation. It's always supported by news.
I call this the "Terror" phase of the crash.
The third phase of the crash has multiple strong rallies. Sharp and aggressive sell-offs and then more strong rallies. Ultimately the market just ranges. This is easy to see after the fact but during it things always feel like some big break is coming. Eventually (Off a strong rally) a big sharp bear break is made. Usually news supported. Very scary because it's fast and it's taking out the lows that looked like they'd hold (Didn't break for a long time in the range) and then this is the final big move of the crash. It will be really scary and it will be the low (At least for a considerable time/price move).
I call this the "Despair" section of the crash.
The "Fright" section of a crash is hard to call a crash starting in. During the final 1/8 of a bull run there will be multiple times the market does things that look like we're in the "Fright" stage. But the "Terror" stage is much harder to mis forecast. The rule of a 161 from the topping swing breaking does not flag up a lot of false signals. Check this - look at the SPX false bear signals from 2015 onward and you'll see none of these broke the topping swing 161. All closed a month above that (Some wicked, like March 2020).
The only previous example you'll find in SPX big charts of the 161 break signal was in 2008 and 2000. In which they were clearly big inflection points. While the things that happen in the "Fright" phase can be a bit different from crash to crash, what happens in the terror phase is remarkably consistent. The above trade plan lays out what I think would be the most important things to note when it comes to practically trading inside of a crash if a crash happened to form in a similar way to previous crashes.
3900 would probably retest (Maybe a low somewhere around 3815 - under 3800 I might sell bear breaks). It's probably best to wait for this.
From 3900 we'd usually see a big bear day taking out the low of the big bull candles to retest 3900.
The lows of these candles would then be retested (But reject from the lows).
The retest of 3900 and then the second lower retest would be optimal points to position. Stop would be 3966 (Would be tighter with PA).
Upon rejecting the retest, the market takes on a clear property of not trading above the high of the last day and closing lower.
A string of this these days would persist to somewhere just under 3100.
After 3100 hitting we'd still have lower to go but it'd get choppier. The easy short is over.
Big sharp rallies can be shorted after this targeting 2550 (More specifics on that at the time if we get there).