Reading the Market
The direction of the overall market influences the behavior of individual securities. Study the overall market first before looking at any stocks in isolation.
US stock markets represent almost half of the combined value of all global markets and significantly influence other markets. Always keep a weather eye on the direction of the 3 averages: the Dow Jones Industrial Average, Standard & Poor 500 and the Nasdaq.
Stay on the alert for events which could have a significant effect on the global (or US) economy. The usual suspects are:
- interest rates,
- oil prices, and
- currency collapses.
The chart below shows 3 major indices over a 5 year period. Their growth rates may vary but all move in sympathy with each other.
The market is the major influence on the performance of an individual security. In Point & Figure Charting Thomas Dorsey compares the impact of the market to other influences on the price of an individual stock:
Actual figures may vary substantially but the largest influence for most stocks will be market risk.
Chart patterns are often used to identify major market changes:
Several market direction systems also deserve mention:
- Stan Weinstein's 30-week Moving Average Model from Secrets for Profiting in Bull and Bear Markets.
- William J. O'Neill's Market Top and Market Bottom signals from 24 Essential Lessons for Investment Success;
- The NYSE Bullish Percent Index explained by Thomas Dorsey in Point & Figure Charting;
- MA Systems use two Moving Averages to identify trend changes.
- MACD Histogram is more suited to traders than investors: signals are generated a lot earlier in the trend but are less reliable as a consequence.
- The Coppock Indicator - an oscillator with one sole purpose: to identify the commencement of a bull market.