Everybody knows about them: Stock Market Crashes, the likes of 1987 or 1929. And they are feared among many if not all investors.

Tales have been told of investors going bust, of the savings of an entire generation disappearing, and how it happened quickly and without warning. But is this true? Was there really no warning of an impending stock market crash? In this article I am going to show that there are warning signs, and how you can avoid future crashes.

The simple fact is, in both major stock market crashes like 1987 or 1929, there are a few clues we have that will alert us to a crash in today’s market.

Number one is that prices in the market fell quite a while before the stock market crash occurred. In fact in both cases of 1987 and 1929, prices fell for a full seven weeks, from the peak to the start of the crash.

The second is that even though prices did fall for seven weeks prior to a stock market crash, there was a bounce in between. What this means is that prices fell, then they rose for one to three weeks, before falling back down through the previous trough in price. And the week after is when the stock market crash happened.

If we look at this particular movement on a price chart, it will look like a downwards zig zag. And it was so prominent that Charles Dow wrote about it intensively in the late 1800s – making it his own as it is called today: “Dow Theory”.

Pretty simple so far, isn’t it? But there is one caveat – I know what you’re going to ask. Will a stock market crash happen every time we see a downwards zig zag? Unfortunately not. If it crashed every time, we would have seen dozens over the last hundred years.

But Dow Theory will give you fair warning of a bear market also – in fact the same action occurred in 2007 – long before the “experts” were calling an actual bear market or recession. Sometimes the down move will be severe like 1987 or 1929, sometimes it will be prolonged like in 2008, and sometimes it will simply reverse again and resume an uptrend.

Overall, it gets it right around 70% of the time. Not bad considering most fund managers can’t even claim to be right 50% of the time.

So what does this mean for a trader or investor like you? It’s simple. If you see the price on the index fall, then bounce for one to three weeks and then fall again through the previous trough in price, now might be a good time to lighten some of your positions. It pays to be ready, and if it doesn’t occur you can always get back in.

Avoid the next crash! With many more ways to avoid a stock market crash, as well as a free course on trading and investing at www.ASXmarketwatch.com.