3 Signs the Market Is Not About to Crash

By Sarah Potter  APR 30, 2014 3:00 PM

To this author, talk of a major stock market correction is just hype.

 


With increased volatility in the markets, many investors have become too focused on impending doom and gloom. In the same way that a broken clock will have the correct time twice per day, market analysts predicting a crash any day now will eventually be right -- but more often than not, they're wrong. In my opinion, rather than worrying about a major correction, investors would be smart to focus on what's actually happening now and not try to outsmart the market. While a crash might be inevitable at some point, three factors support a continued move long:
 
1. The long-term trend is still intact.
 
Markets behave in cycles. Just as the fashion in our wardrobes comes and goes, so does the cyclical nature of market behavior. The bulls and bears each have a turn at the helm of the market; either one can appear at any time. Right now, the S&P 500 (INDEXSP:.INX) is clearly in an uptrend, as is evident on longer-term charts such as the weekly and monthly time frames. Specifically, the 21EMA on the weekly chart is holding at 1826.75. And while price in March pulled back, retracing to the 35EMA at 1790.50, it's clear that the uptrend continues, as price is now at 1874.

What might appear as market weakness on a short-term chart is actually support on the weekly. The pullbacks that we've seen so far in 2014 are far from the predictions of a 50% correction that some are calling for this year. In fact, looking at the monthly ES chart, the trend looks even stronger, with price bouncing nicely off of the 8EMA at 1800.50, making higher highs. So far this year, price is proving that the long-term trend is strong and intact.

Click to enlarge.
 
 

Click to enlarge.

2. Economic data is still positive.
 
Let's face it: The economic data being released is positive and improving. The Fed's commitment to keeping interests rates low will continue to encourage investors to enter the markets. At this time, the latest economic reports show consumer confidence at 82.3, which is the highest rating in the last few years. Factory orders are up, and gold fell 28% in 2013, signaling that the markets are pricing in the good news. The consumer price index is also increasing, signalling increased prices as a result of increased consumer demand -- again, a positive sign for the economy.
 
3. There's confusion between "market correction" and "market crash."
 
Price has been more volatile. But even when the market sees retracement, an investor can't forget that a 10% correction is a normal cycle and still leaves long-term trends structurally sound. A 10% correction would take the ES to around 1673, which is around the monthly 21EMA -- a level to which we haven't seen a retracement since 2011, but a shallow retracement nonetheless. Retracements to the 21EMA are normal and to be expected. So why would a 10% retracement be cause for concern and "the beginning" of a much larger move down?
 
I would agree with those who say that the economy isn't perfect. There are days when the markets seem shaky. However, at this time, when an investor accounts for a normal 10% retracement and looks at the long-term trends and support from improving economic indicators, it becomes clear -- at least to me -- that the market is far from crashing.

Sarah Potter is the founder of SheCanTrade.com, an education and community portal for active investors of all experience levels. Sarah's book How You Can Trade Like a Pro is a straightforward guide to trading options, futures, and ETFs. Sarah's YouTube channel has a growing library of videos on trading strategies, market analysis, and live trading sessions.

No positions in stocks mentioned.