1. Money

How to Spot Stock Market Trends

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Like a boxer, the stock market usually tells you what it’s 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, it’s 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. I’m not talking necessarily about one-day bumps, but general upward and downward trends – bull markets and bear markets.

Market Direction

For this reason, it’s 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.

You’ll 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, that’s 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? Don’t 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.

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