How to Spot Stock Market Trends
Like a boxer, the stock market usually tells you what its going to do
before it happens if you pay attention to the signs.
A boxer will jab with the left hand several times, forcing the
opponent to dodge away to their left, and then the boxer will come
across with a big right hand punch.
Okay, its not a great analogy, but the stock market will send you
signals about what direction it is heading if you pay attention.
Most, but not all, stocks move with the overall trend of the market.
Im not talking necessarily about one-day bumps, but general upward and
downward trends bull markets and bear markets.
Market Direction
For this reason, its important to have an idea what the general trend
of the market seems to be and what the market is telling us about
future trends.
You can get a good idea of where the market is headed with just two
pieces of information: Price and volume. When you put these two
together, you get a picture that tells whether there are more sellers
in the market or buyers.
Volume tells you whether there is movement in the market and price
tells you which direction.
We use the big three indicators: the Dow, the S&P 500 and the Nasdaq,
to provide one of the indicators price - to help us decide whether the
market is going to continue its current trend or trying to reverse
course. For more information on these leading market indexes, see this
article.
Volume Indicator
The volume indicator comes from the daily sales volume. Both of these
indicators are available online from many different sites including:
Yahoo! Finance.
If the market has a high-volume day and prices (of the indexes) are
up, you are probably looking at mutual funds and institutional
investors buying, which is a sign of an up market trend.
On the other hand, a high-volume day with lower prices could mean a
downward trend with the big players backing out of the market.
You need to use some common sense when watching these indicators. For
example, if you have three or four days of high volume and rising
prices, it is not unusual to hit a high-volume day where the prices
fall off.
Youll usually hear the talking heads on television refer to this as
profit taking.
Change Coming
If you begin to see the down days too frequently in a market that has
been moving up, it may be a sign that it is about to reverse course or
stall.
Mutual funds and institutional investors are the volume buyers and
sellers that move the market. When they began moving in a direction,
thats where the market goes and you can see it in the price and volume
numbers.
A market that shows sharp price movements in either direction without
corresponding volume increases is sending false messages that should
be watched carefully.
What does this mean to you? Dont swim upstream. The obvious forces of
supply and demand (except when something extraordinary occurs) drive
the market. When there are more buyers (higher prices on higher
volume) than sellers, the market is trending up.
When there are more sellers (lower prices on higher volume) than
buyers, the market is trending down.
Watch for signs that the market is changing course (different price
and volume than the prevailing trend), if you see more than a few of
these, prepare for a change.
Conclusion
Reading the market from one day to the next may not be helpful, but
you can watch the general direction of the market and with some study
spot the warning signs that a change is coming.
