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If there is anything that strikes fear into the hearts of stock market investors, it is a major stock market crash. Stories are still told of how these two events in 1987 and 1929 alone wiped out entire generations of wealth. And that it happened so fast they didn't see it coming. But how quickly did it really happen? Were the warning signals there? In this article I will show you a quick and easy method for being aware of an impending stock market crash, and how you can avoid it.

The truth is, both of the major stock market crashes through 1987 and 1929 yielded many facts that we should be aware of, and we can also spot them in the future.

The first is that prices started falling weeks before the actual stock market crash occurred.

In the case of 1987, a full seven weeks of lower prices from the previous high happened.

In 1929 it was also seven weeks from the previous peak. Number two is the fact that between this seven week period, prices bounced. What does this mean? Prices fell from the peak, then rose for one to three weeks before falling again – this time through the previous trough in price.

In both cases the very next week was the week of the stock market crash.

If we look at this particular movement on a price chart, it will look like a downwards zig zag. And it was so prominent that Charles Dow wrote about it intensively in the late 1800s – making it his own as it is called today: “Dow

Theory”. So, it's pretty simple so far, right? Yes, but does a stock market crash happen every time we see a zig zag down in price? In simple terms, no. This zig zag can happen quite often, especially when we look back over the last century. However Dow

Theory doesn't just warn of crashes – it works for Bear Markets as well.

In fact if you take a look at 2007 – a few months before the “experts” were talking about recession – you will see a quiet little Dow

Theory zig zag down. So sometimes the move will be severe like 1987 or 1929, sometimes we may get a recession, and sometimes it may just turn around and go up again.

The truth is, the probability is around 70%, which is still extremely high when investing in the market. So what does this mean for you? It's simple. As an investor, if you see price fall, bounce, and then fall through the previous trough (most notably on a weekly price chart), then it might be a good time to lighten some of your positions and be ready.

You can always get back in again if a crash doesn't happen.
Get more ways to avoid a stock market crash and make more money in the stock market at Dave McLachlan's site, www.ASXmarketwatch.com .

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