A reliable technical indicator, called the death cross, reveals a market downturn is coming soon. The death cross occurs when the 10-month moving average crosses below the 20-month moving average. In the past twenty years, this has only happened twice, in 2001 and 2008. Both times the stock market crashed soon afterwards.
The chart below shows 20 years of stock market price movements with the red line showing the 10-month moving average and the green line showing the 20-month. In late February 2016, the death cross appeared when the red line dropped below the green line. The chart was provided by businessman and market investor Aaron Brickman. Aaron has studied historical patterns in major market crashes and used his findings to successfully trade the market crashes in 2001 and 2008.
Each bar on the graph represents one month of data. Click on the image to see a larger version.
The appearance of the death cross shows the end of a long-term bull market and the beginning of a new long-term bear market. In the short term, it indicates we could see serious selling in the stock market.
The image below provides a close up look at the recent death cross:
After the appearance of the death cross, markets have historically followed a pattern of bouncing back up to the 20-month average, which is referred to by technical analysts as an underside retest or a kiss-back. Although it is an upward movement, it is consistent with bearish patterns. When the 10-month average fails to move back up above the 20-month average, the test is failed and the bear market accelerates.
In 2001, the underside retest occurred from December 21 2000 (Point A) until January 31 2001 (Point B). Over the next 37 trading days, the market dropped from Point B to Point C, which was a -22% drop.
In 2008, the same pattern was followed. The underside retest occurred from May 19 (Point A) until July 15 (Point B). Over the next 40 trading days, the market dropped from Point B to Point C, which was a -17% drop.
Implications for 2016:
The same pattern has repeated in 2016. As shown in the graph, the market dropped down to Point A, which is also the support level, indicated by the blue line (S&P 1,800 and Dow 15,480). It then bounced back up to Point B, reaching a top on Friday April 1 2016, 2,075.07 in the S&P and 17,811.48 in the Dow (intraday). The move up to Point B also formed the final leg of the triple-top reversal (W-pattern), which is another bearish pattern.
If this pattern continues, we can expect to see a drop of 17% to 22% over the next 37 to 40 trading days, which would translate into the S&P dropping to about 1,618.55 to 1,722.31 and the Dow Jones dropping to about 13,892.95 to 14,783.53. The target dates for reaching the bottom would be May 24-27. These projections are based only on the historical patterns without consideration of any other factors.
If we continue following the historical pattern, the market will soon begin testing the support level (blue line) and will eventually break through it. The new bottom will become the next Point C. Regardless of how far down it goes, there will likely be a one or two month pause, as shown in 2001 and 2008 when the market rallied back from Point C to Point D. The rally makes a final underside retest of the 10-month moving average. If that fails, the bear market then accelerates even faster.
These historical patterns are consistent with prophetic warnings about a market downturn beginning during Passover. There are also reasons to believe the 2016 drop could exceed 2001 and 2008 due to increased sovereign debt levels and increased exposure to derivatives in our financial system.
Author: James Bailey
James Bailey is a blogger, business owner, husband and father of two grown children. In 1982, he surrendered his life to the Lord Jesus Christ. In 2012, he founded Z3news.com to broadcast the message of salvation by reporting end time news before it happens.