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Understanding Stock Market Trends

Jason BondJason Bond ·

While there is no way to magically predict stock market performance, stock market trends help investors understand how it fluctuates. Investors identify stock exchange trends using various forms of technical analysis, such as technical indicators, trend lines, and price action. To effectively identify and use stock market trends, you first need to understand what they are.

What are Stock Market Trends?

Stock market trends indicate the general direction of an asset or market by highlighting when prices are making lower-swing lows and highs of a downtrend or higher-swing highs and lows of uptrends. Most investors follow trend directions when making investment decisions while a slight few invest against the trend or look for reversals.

How Stock Market Trends Work

Overall, increases in stock prices identify uptrends. Since nothing continues moving straight up indefinitely, there will be oscillations, but the overall direction of the price will continue to be higher. Recent low swings should be higher than previous low swings with the same being said for high swings. As this structure begins to breakdown, the uptrend may start losing steam or reverse completely into a downtrend made up of lower low and high swings.

During an uptrend, most investors believe it will continue until evidence proves otherwise. This evidence could include technical indicators turning bearish, lower-swing highs or lows, or the price breaking below a trend line. During this time, many investors focus on purchasing stocks and attempt to profit from continued price increases.

During a downtrend, investors focus more on shorting or selling, minimizing their losses, or profiting from price decreases. While not all, most downtrends reverse at some point. As the price continues to decrease, more investors start to see the stock as a bargain and jump into the game to buy. This could result in an uptrend beginning.

Investors focusing on fundamental analysis also use stock market trends by looking at changes in earnings, revenue, or other economic and business metrics. For instance, fundamental analysts might look for trends in revenue growth and earnings per share. If earnings have grown for the past five quarters, this signifies an uptrend. However, if profits have decreased for the same amount of time, it signifies a downtrend.

Even a lack of a trend, or a period of time with little progress upward or downward, is considered a trend, identified as a range or trendless period.

How to See Stock Market Trends

Being aware of stock market conditions and how to identify stock market trends is an important first step for any investor new to technical analysis. Investors invested in an uptrend usually stay there while watching for any red flags to appear in the ride up, generally an indicator to jump off and enjoy the profit. Types of trends experienced investors look for include:

  • Short-Term Stock Market Trends
    Short-term trends are any movement in stock prices that happen over a couple of hours or days. Using technical analysis, these trends can usually be predicted with a reasonable degree of accuracy. Investors can make large profits and, in some cases, significant losses with short-term trend predictions. Value traders usually minimize the importance of short-term stock market trends.
  • Intermediate Stock Market Trends
    Intermediate trends is a stock’s likely performance over a set period of time, generally a couple of weeks to six months. When looking to account for an intermediate trend, technical analysts watch for cyclical behavior. For example, when a long-term bull market is identified with a relatively consistent set of rallies and reactions every couple of weeks, an analyst may look at the intermediate trend as reasonably bearish without taking away from the long-term bullish trend.
  • Long-Term Stock Market Trends
    Long-term trends are any movement in stock prices that happen over a significant period of time, usually one to several years. They are often hard to predict and often interrupted by quick movements against the trend. This happened during the 1990’s dot.com bubble when the NASDAQ average saw consistently high growth. However, this didn’t mean the NASDAQ rose every day or week.
  • Primary Stock Market Trends
    Usually referring to a trend expanding roughly four years, primary trends are an overarching, long-term marketing trend for a stock. Primary trends can be bearish or bullish and take precedence over periodically occurring short-term trends in market analysis. For example, a stock that climbed 15% in annualized terms from 2016 to 2019 dropped 4% in 2017. This doesn’t change the upward, primary trend.
  • Secular Stock Market Trends
    A stock market trend lasting up to three decades, secular trends hold many primary trends within its parameters and are often easy to identify. When looking at the 25-year price-action chart, investors will often simply see several straight lines with little movement up or down.

Responding to Stock Exchange Trends

Both individual stocks and stock markets routinely trend. Indices are likely to move one direction or the other until something happens to change that direction. Movements of higher highs and lows are known as uptrends, while lower highs and lows signify downtrends.

  • Distribution Days Signal the End of an Uptrend
    Every uptrend market reaches an ending point, or Distribution Day, when more people are selling stocks than buying them. Over 100 years of research show that five to six distribution days over four to five weeks are enough to reverse an uptrend to a downtrend.

    Once an investor sees a distribution day on one of the major indexes, they should pay close attention to other major market index charts in the coming days. If the second or third distribution day occurs, they should be cautious with most already selling a stock or two. By the fifth distribution day within five weeks, they should have significant concern that the market may be rolling over.

    At the same time, investors are noticing distribution in market indexes. They will likely also notice leading stocks, best price performers in a market cycle, and show signs they are topping. Leading stocks showing signs of weakness in volume action or price provide another indicator of stock market trends changing.

  • Act on Trends Emerging in the Market
    Once investors see signs of weakness in the market, they need to take action. They shouldn’t buy additional stocks and consider raising capital by selling their weakest stocks. If the stock market continues to weaken, investors should continue to sell shares and move capital. No one knows how far a downtrend may go, and by taking defensive actions, investors protect themselves against devastating losses severe corrections may cause.
  • Follow-Through on a Solid Market Rally
    Once a stock market goes into a downtrend, investors should continue to watch it carefully as it likely will rally and recover for just a few days. These rallies are usually fake-outs, and investors should wait until they can confirm an uptrend change with an explosive up day signaling the market is changing. These signals are called follow-through days, which generally happen between the fourth and seventh days of an attempted rally. On the follow-through day, one key market index will close up by a significant amount, usually 1.7% or more, with a higher trading volume than the previous day.

    A new bull market has never started without a follow-through day, however not all follow-through days signal the start of a new bull market. It does provide investors the go-ahead to start mining their Watch List of high-quality stocks, watching for any that are reaching proper buying points. Buy in stages and allow the actions of individual stock prices to confirm a true uptrend before buying more stocks.

The Bottom Line

As much as investors wish there were, there simply is no magic secret to becoming a skillful investor. It takes dedication, time, and a commitment to understanding stock market trends. Learning professional-level investing skills can help investors take better control of their financial future. Receive the strategies, expert insight, and tips you need to optimize your profiles and trading skills by signing up for Raging Bulls Sniper Report today!

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