Put a pin on this one. | Source: ShutterstockZ
One major market index, the Russell 2000, has shown price behavior that is very worrisome. A decline of more than 1% from Tuesday’s close could be the first crack in the stock market dam that begins a wholesale stock market crash.
When a major stock market index like the Russell 2000 is this close to falling apart, you need to be ready to head your portfolio by keeping an eye on the other stock market indices.
Why so serious, stock market?
The stock market is at its third most expensive valuation history, as you can see from this chart.
Shiller PE Ratio | Source: Multpl
The yield curve keeps inverting, suggesting a recession might occur. Third-quarter corporate earnings have not been stellar. The federal government is starting to crack down on the most successful companies in the stock market. Manfacturing data is weak.
All of this news, plus the trade war with China, adds up to a strikingly large possibility of a market meltdown.
Rather than simply short-sell the entire stock market because things look bad in the aggregate, you can use the simplest forms of technical analysis to help you determine when to begin selling the market short.
Timing is everything
Right now, you want to be looking at three very simple trendlines on market indices that will tell you when to short the market.
The first is called the 50-week moving average, which is simply an average of the closing price of the index over the last 50 weeks.
The second trendline is the 200-week moving average, which is calculated the same way,