Market Crashes Can Be Obvious — If You Know Where to Look
A quick primer on some basic technical signals that can warn of disaster before it strikes.
Many people think the 2008 stock market crash came out of nowhere. It didn’t.
The signs were there for months ahead of time — but only if you knew how to read them.
What follows isn’t a deep dive into complex Elliott Wave theory or predictive fractal models. It’s a quick-and-dirty education in some very basic technical analysis, using one annotated chart of the S&P 500 that covers the run from 2003 to the 2008 crash. It’s not everything I knew at the time, and it’s nowhere near everything I know now — my goal is to write a “keep it simple primer,” not a book. Which is more than enough to show that the market didn’t just “accidentally” crash — it set up for it, cleanly and predictably.
Let’s start with the chart, then I’ll walk you through what it’s saying:
1. Confirmations and Divergences: The Market’s Simplest Signals
Look at the RSI (Relative Strength Index) at the top of the chart. When price makes a new high and RSI also makes a new high, that’s called a confirmation. It usually means momentum is still healthy, and another high is likely.
But when price makes a new high without RSI confirming it? That’s a divergence, and it’s a (minor) red flag. It doesn’t guarantee a top, but it’s often the first crack in the armor. It tells you momentum is waning, because buyers are thinning out.
You can see on the chart where those red lines show up. Those weren’t just noise. They were early warnings.
2. Support Became Resistance
The long-term median channel line (blue) had acted as support multiple times since 2003. That’s not coincidence — markets remember key levels.
In early 2008, SPX broke below that trendline and failed to reclaim it on three separate back-tests. Each time, sellers stepped in. That was a huge tell. What was once strong support had now become resistance. That’s one hallmark of a changing trend.
3. Head and Shoulders Pattern
Right before the crash, the S&P formed a classic "head and shoulders" pattern — these show up all the time at major tops. Once the neckline breaks, it often triggers a strong move down.
The market even had the decency to back-test the neckline before collapsing. That back-test was rejected, which was a giant red flag.
4. Trend Channel Support Became Resistance Just Before the Crash
In August 2008, we saw another key rejection. The market rallied back to the long-term channel… and failed again. Sellers had taken control. If you understood basic TA, this wasn’t just noise — it was the final nail in the bull market’s coffin.
That rejection is what’s called the “kiss of death.” The market failed to reclaim its long-term uptrend, which is usually a sign that the playbook has flipped. Which meant stop “buying the dip,” and start “selling the rip” (rallies).
5. One Day Before? The TARP Vote Was Just the Trigger
Some people ask, “Were there any signs RIGHT BEFORE before the crash?” Sure. The market gave one final bounce the day before the TARP vote. That bounce was “a gift from the market gods” as far as I was concerned, so I shorted it with both hands.
But even if you were late to the party, the technicals gave you an out. RSI had confirmed lower lows. The back-test of the broken trendline had failed. Momentum was cooked. Psychology had turned. You had every reason to be out of the market — or be short.
6. Charts LEAD the News
One of the biggest lies in finance is that "news drives the market."
But it doesn’t.
News is the narrative after the fact. The charts lead. News outlets just try to explain what already happened by giving readers a “why” that seems to make sense — even when it’s wrong.
You can prove this with observation: sometimes the market rallies on bad news (such as a bad jobs report). Sometimes it tanks on “good” news. If news were the driver, the reaction would be consistent — but it’s not.
It’s actually funny to watch the financial media try to explain market moves after the fact; they’ll often just add “despite” when the news item makes no sense to their “news driven model”:
Market Rallies DESPITE Bad Jobs Report
Market Falls DESPITE Cooling Inflation
Stocks Crash as Investors Realize Pop Tarts Are Flammable
What really moves the market is mass psychology. And technical analysis is just a framework to read that psychology in real time. TA reflects the truth behind the news, because TA attempts to read the fundamental forces of the market itself.
7. Even Basic Signals Can Save You
You don’t need to be an expert in TA or Elliott Wave to sidestep disaster. If you had simply used RSI divergences, watched for failed support-turned-resistance retests, and recognized the head and shoulders pattern, you could have potentially avoided the bloodbath.
Or better yet, you may even have profited from it. Many of us did.
8. If You Want to Go Deeper
People often ask me for book recommendations, so here are a couple good starting points:
Technical Analysis of Stock Trends — Edwards & Magee
The Elliott Wave Principle — Prechter (Long parenthetical: Please note that Elliott Wave Theory is difficult to practice; there are only a handful of analysts who practice it well, and Robert Prechter is NOT one of them. But the theory is sound, even if his personal application of it is not — and this book will teach you the theory. Which, even if you can’t practice it with nuance, will still help provide the framework for everything else. Elliott Wave explains “the gears beneath the market” — how the market moves as a whole.)
Here’s an article (on my website) that covers some basics in a bit more detail: Basics of Technical Analysis, and Understanding Elliott Wave Theory, Part I
Elliott Wave is difficult to master, but it’s worth learning for the “10,000-foot view” it provides for everything else. But even without it, you can use basic tools to hopefully protect yourself.
And sometimes, that’s all you need.
See also:
