March 25: Identifying trends in the Stock Market

by David Jenyns on March 25, 2007

If there was ever an industry that would benefit if psychics were real, it would be stock investing. Much of investors’ and brokers’ time is spent trying to predict what the market will do in the next few days to months. However, the process is not all speculative guessing. If one pays close attention, the market will actually indicate which way it is going. Learning to read the signs of the market takes a little time and patience but the rewards will be great.

The market itself can indicate how a stock will fare in the coming months. Looking at the overall direction of the market will tell you about future trends. Most, if not all, stocks move with the market. If the stock market is experience a period of growth (a bull market) most stocks will steadily grow. If the stock market is in a decline (a bear market) most stocks will slowly lose value. There may be one day bumps here and there but the general trend will follow the flow of the market at large. Two determine the direction of the market only two pieces of information are needed; price and volume. Price refers to the trend of prices of stocks. Volume refers to the amount of stocks being traded. When these two figures are put together it reveals whether there are more sellers in the market or there are more buyers.

To determine price, investors and brokers use the big three indicators: the Dow Jones Index, the S & P 500 and the NASDAQ. These indicators help investors and brokers determine whether the market is going to continue in the current trend or reverse course.

To determine volume, investors and brokers look to the daily sales volume of the markets. The daily sales volume is easily obtained from several websites online.

If the market has experienced a high-volume day and prices are up (on the three indexes) then the market is up. When these conditions exist larger investors, such as institutional investors and mutual funds, will buy more and will boost the market further upwards.

Conversely, if the market had a high-volume day but prices on the indexes are down, this can indicate that more stocks are being sold. It is a sign of the bigger investors backing out of the stock market and can be a sign of a downward turn.

However, a high-volume, low-price day does not necessarily mean a turn for the worse. Often times if there are several days in a row with high-volume and high prices, there will be a day where the volume remains the same and the prices decrease. This trend is referred to as “profit taking” and is a result of investors taking the profits they built up in the last few days.

If there is a continual presence of down days in the market, it could be a sign of a stall or a reversal of course. Institutional investors and mutual funds buy and sell in large volume which means they have the power to move the market. When they begin moving in a direction, the rest of the market follows.

In addition to these larger investors, there are also other factors that move the market. Inflation and interest rates can affect people’s ability to invest in the stock market. War, terrorism and serious political unrest can cause negative turns in the stock market as well. The market is most often affected by uncertainty in the future. If there is a chance something in the country might change, its effects are shown in the marketplace. Surprising news and unexpected events disturb the sense of control that the stock market has. If not watched carefully these unexpected events can send the market into a downward trend, or worse, a tailspin.

Watch for signs of the market changing course and prepare yourself as best you can for other factors. If you need to sell a stock keep a watch on the company’s earning reports, Fed meetings and other relatively predictable events that can take points from your stock. However, the bumps that occur on a daily basis will smooth over rather quickly and do not affect most investors.

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