As can be clearly seen during this October sharp market correction, we need a canary in a coal mine to warn us of impending danger in the stock market.
Despite of so many market experts, NONE knew the timing when it came to this October carnage.
However, I did warn of some "red flags" ahead in a September 25 posting titled "Chart Points To Watch: KLCI & US" .. as I noticed the KLCI Index dropping below the 200 day moving average line. (also called The sell all signal).
But never in my wildest dreams did I think the market correction will come so fast and so bad!
It goes to show how "difficult" it is to predict the stock market irrational behaviour, if not, many investors will be multi-millionaires by now.
So we need an advance warning system a.k.a ..a canary in the coal mine ..to warn us of impending market dangers before the big storm approaches.
1) The KLCI Index 200 day MA
Watching the KLCI Index closely might provide some "clues" as to when the stock market might suffer a sharp correction ....especially when it break the 200 day moving average line but for most people it could be too late!
When I told my friends to sell their shares, they are reluctant to do so because by this time those shares have already dropped a lot from their highs.
This is one good indicator if it is not manipulated as the govt funds like EPF, LTAT, Khazanah are controlling this index. Many times you see the index break the 200 day MA only to jump back up again (a false breakdown).
2) The "all-time high" market volume
On August 20th a Wednesday, the total market volume hit 7.669 Billion shares, an all time record high. It was mostly due to the trading of penny stocks. Read the article " Bursa trading hits all-time high".
The "all-time high" market volume is a big Red Flag because in the past, the market corrects sharply after this event happened because this indicate extreme bullishness!
Also, with such high volume, it is obvious that many investors have over extended themselves over their respective financial limits.
3) The Penny Stocks Rally
On a daily basis, you see the only action in the market is the market rumors, high vol, the jumping of penny stocks.
In stock forums, you see only the majority of postings in penny stocks threads.
In most markets, penny stocks are usually the last categories of stocks to move after all others categories of stocks become too expensive to own.
They (penny stocks) also indicate the correction or bear is coming as during this final phase, there are usually lots of newbies investors and punters with irrational behaviour coming into the market for a quick profit.
With the 3 canary in the coal mine I've listed above, which unfortunately all of them have already happened, hopefully for the future we are more aware of the warning signs before investing.