This Strategy Can Protect You from Stock Market Drops

Stock Market Drops
This Strategy Can Protect You from Stock Market Drops

Over $70 billion was wiped off the Aussie stock market last week. Some of that was your money…

There’s a reason I’m telling you this. I want you to pay special attention.

Normally, writing to you would take much preparation. I spend time scouring the current trends, news and even world events…

The whole purpose is to try and make sense of the chaos and see where opportunities lie.

But today, I’m coming to you for a completely different reason.

This week, apart from an odd article here and there…I haven’t paid much attention to the mainstream news.

It’s in the form

There’s one thing no one ever speaks about…

It’s called ‘form reading’. Have you heard of it?

If you haven’t, that’s OK. All it’s about is reading charts from a longer-term view.

What’s the form? That’s the question readers ask.

It’s really nothing fancy, despite the name.

However, this is important because we often get caught in short term gyrations.

That’s despite that stock market having some sort of pullback every year. We always tend to freak out over it. What’s happening now isn’t unusual.

History suggests that the market rises 80% of the time and declines 20% of the time.

That’s a much more positive outcome than headlines would suggest! Let’s take a moment to appreciate what I call the 30,000-foot view on the Aussie share market.

I’ve got something to show you.

See the Aussie top S&P/ASX 200 [ASX:XJO] below…

Stock Market Drops S&P/ASX 200 [ASX:XJO]

Source: Optuma

What you’re looking at above is nearly 30 years of XJO data. It’s a one-month bar chart.

Not many people look at this much data. They’re too concerned with the daily price action.

But can you see the form?

Now take a look at the same chart below, with some annotations of mine…

Source: Optuma

I’ve highlighted a trend line going all the way back to X.

This is the longer-term form of the XJO. As you can see, the market has respected this angled trend line since the market was formed.

As the market began approaching the angle this year, it was reasonable to assume the market could hit some resistance.

The further back you go, the clearer it becomes

Low and behold, the Aussie XJO pushed against the line before dropping lower.

Is this the end of the world? Are we phasing into the next global financial crisis?

Look, most likely not. I’m not afraid. Are you?

But there is one thing I want to say about the form of the XJO.

I just can’t see us entering into a runaway market until the XJO can bust above the angled line.

Which is another reason why I scoff at the thought that we’re in some form of a bubble.

Look at the action that occurred from 2004–07. Now that’s run-away!

Take a 30,000-foot view

Here’s your takeaway.

When you’re attempting to form read the market, it can help to do it from a 30,000-foot view…

It will give you greater clarity to what’s going on and will also alert you to the trajectory of the market.

Right now, the current pullback is nothing more than an expected reversal.

In fact, if you get technical on your form reading, you’d never be shocked when markets pull back.

Anyway, if you like this concept, go ahead and email me letting me know your thoughts.

In a future issue, I’ll dig deeper into market angles and how you can use simple form reading to gauge an overbought and oversold market.

Until next time,

Jonathan Evans Signature

Jonathan Evans,
Analyst, Profit Watch