Table of Contents
1. Introduction.
2. How Stock Market Trends Work?
3. Market Mentalities.
4. Types of Stock Market Trends.
5. Stock Market Trend Analysis.
6. Channel Lines.
7. Support and Resistance
8. Significance of Stock Market Trend.
9. Economic Factors affecting Stock Market Trend.
10. Conclusion.
1. Introduction
What is Stock Market Trend?
2. How Stock Market Trends Work?
The truth is there is no magical way to predict the stock market.
Many issues affect rises and falls in share prices, whether gradual
changes or sharp spikes. The best way to understand how the market
fluctuates is to study trends.In this article we will discuss
stock market trends, which help investors identify what stocks to buy
and when. Keeping track of upswings and downswings over the history of
individual stocks, as well as being aware of market-wide trends, helps
investors plan buying and selling. Many factors affect prices in the stock market, including inflation, interest rates, energy prices, oil prices and international issues, such as war, crime, fraud and political unrest.Sudden
rises or drops in stock prices are often called spikes. Spikes are
extremely difficult, if not impossible, to predict. Stock market trends
are like the behavior of a person. After you study how a person reacts
to different situations, you can make predictions about how that person
will react to an event. Similarly, recognizing a trend in the stock
market or in an individual stock will enable you to choose the best
times to buy and sell.
3. Market Mentalities
Before understanding the value of the different Market Mentalities, one thing should be clear in all the readers minds that the market is classified mainly into three major categories:
- Secular Market
- Primary Market
- Secondary Market
Secular Market Trend :
A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a series of primary trends. A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets.
Primary Market Trend :
A primary trend has broad support throughout the entire market (most sectors) and lasts for a year or more.
Bull market
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| Bull Market |
A bull market is associated with increasing investor confidence, and
increased investing in anticipation of future price increases (capital gains). A bullish trend in the stock market often begins before the general economy shows clear signs of recovery. (capital)
Bear market
Market top
A market top (or market high) is usually not a dramatic event. The market has simply reached the highest point that it will, for some time (usually a few years). It is retroactively defined as market participants are not aware of it as it happens. A decline then follows, usually gradually at first and later with more rapidity.
Market bottom
A market bottom is a trend reversal, the end of a market downturn, and precedes the beginning of an upward moving trend (bull market). It is very difficult to identify a bottom (referred to by investors as "bottom picking") while it is occurring. The upturn following a decline is often short-lived and prices might resume their decline. This would bring a loss for the investor who purchased stock(s) during a misperceived or "false" market bottom.
A market bottom is a trend reversal, the end of a market downturn, and precedes the beginning of an upward moving trend (bull market). It is very difficult to identify a bottom (referred to by investors as "bottom picking") while it is occurring. The upturn following a decline is often short-lived and prices might resume their decline. This would bring a loss for the investor who purchased stock(s) during a misperceived or "false" market bottom.
Secondary Market Trend :
Secondary trends are short-term changes in price direction within a
primary trend. The duration is a few weeks or a few months. The two
types of Secondary Market Trends are Correction and Bear Market Rally:
Correction -
A market correction is a secondary or short-term stock market trend where stock prices fall 5-20% over a relatively short period of time, such as a few weeks or up to several months. Corrections are generally temporary price declines interrupting an uptrend in the market (or an asset). A correction has a shorter duration than a bear market or a recession, but it can be a progenitor to either. Note: A bear market should not be confused with correction, which is a short-term trend that has a duration of less than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do.
Bear Market Rally -
A bear market rally is a sharp move up in the context of a larger bear market. It is actually a period in which prices of stocks increase during a bear market. A bear market rally is usually a short-lived market increase following a period of market decline and is followed by another period of market decline leading to a highly down trend. Bear market rallies occurred in the Dow Jones index after the 1929 stock market crash leading down to the market bottom in 1932, and throughout the late 1960's and early 1970's. Although there are no official guidelines for a bear market rally, it is sometimes defined as an overall market increase of 10-20% during an overall bear market.
4. Types of Stock Market Trends:
The Stock Market Trends are classified under three main categories:
Uptrend:
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| The line showing the Uptrend |
Downtrend:
Describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.
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| The line showing the Downtrend |
Describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.
Sideways Trend:
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| The line showing the Sideways Trend |
Describes the horizontal price movement that occurs when the
forces of supply and demand are nearly equal. A sideways trend is often
regarded as a period of consolidation before the price continues in the
direction of the previous move. A sideways price trend is also commonly known as a "horizontal trend".
5. Stock Market Trend Analysis.
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| Technical Analysis of Stocks |
6. Channel Lines
The price action contained between two parallel lines in a trendis called a Channel. In a
price channel, the lower line is the Trendline drawn on pivot lows, and
the upper line is the channel line drawn on pivot highs. The two lines
of a channel represent support and resistance. In an uptrend, for
instance, a trade might be entered at the support of the trendline
(shown by the green arrows in the chart) and exited at resistance of the
upper channel line (shown by the red arrows). Channels show trend
direction for any time frame. Trend, or price channels, can be up, down
or sideways.
7. Support and Resistance
Support
A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level.
Resistance A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level.
8. Significance of Stock Market Trend.
In
order for an economic indicator to have predictive value for investors,
it must be current, it must be
forward-looking and it must discount current values according to future expectations. Meaningful statistics about the direction of the economy start with the major market indexes and the information they provide about:
Stock and stock futures markets
Bond and mortgage interest rates, and the yield curve
Foreign exchange rates
Index of Leading Economic Indicators
Weekly Data
Monthly Data
Unfortunately, trends are not always easy to see. In other words, defining a trend goes well beyond the obvious. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.
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| Figure 3 |
Figure 3 is an example of an uptrend. Point 2 in the chart is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend, each successive low must not fall below the previous lowest point or the trend is deemed a reversal.
9. Economic Factors affecting Stock Market Trend
Economists typically group macroeconomic statistics under one of three headings: leading, lagging or coincident. Figuratively speaking, one views them through the windshield, the rear view mirror, or the side window. But how can an investor determine the direction of the economy in this blizzard of data?
Coincident and lagging indicators provide investors with some confirmation of where we are and where we've been, but here we'll take a look at the leading economic indicators. They're a good place to start, because they help us understand where the economy is heading.
Market Indexes
Coincident and lagging indicators provide investors with some confirmation of where we are and where we've been, but here we'll take a look at the leading economic indicators. They're a good place to start, because they help us understand where the economy is heading.
Market Indexes
forward-looking and it must discount current values according to future expectations. Meaningful statistics about the direction of the economy start with the major market indexes and the information they provide about:
Stock and stock futures markets
Bond and mortgage interest rates, and the yield curve
Foreign exchange rates
Commodity prices,
especially gold, grains, oil and metals Although these measures are
crucial to investors, they aren't generally regarded as economic
indicators. This is because they don't look very far into the
future - a few weeks or months at most. Charting the history of indexes
over time puts them in context and gives them meaning. For instance, it
is not terribly useful to know that it costs $2 to purchase one British
pound, but it may be useful to know that the pound is trading at a
five-year high against the dollar.
Index of Leading Economic Indicators
Ironically,
the Conference Board's Index of Leading Economic Indicators (LEI)
really isn't leading data. Upon release, the data is almost two months
old, and most of the 10 component reports have been released prior to
the LEI itself. It purports not to signal a change in market direction
until the index has moved in the same direction, up or down, for three
consecutive months, which it rarely does. It is widely viewed as a
better harbinger of recession than expansion. However, it has predicted a
number of recessions that did not occur, having once prompted American
economist Paul Samuelson to suggest that "economists have correctly
predicted nine of the last five recessions."
Weekly Data
The
Jobless Claims Report, is a report released weekly by the Department of
Labor. In a weakening economy, unemployment filings will trend upward.
They are generally analyzed as a four-week moving average (MA), in order
to smooth week-to-week variance. However, this report has a built-in
bias in that self-employed persons, part-timers and contract employees
who lose their jobs don't qualify for benefits and thus are not counted.
Money supply, an abstract, technical calculation of how much
money is sloshing around in the economy is released by the Federal
Reserve. An upward trend suggests inflation. However, in a digital world
in which vast sums of money can be transmitted across the globe in an
instant, this indicator has lost much of its importance over the last
decade.
Monthly Data
Several
of the monthly data reports present data that is several months old,
and can be characterized as leading from the rear, in something of an
"I-told-you-so" fashion:
The New Residential Housing Construction
Report, commonly referred to as "housing starts" is a report released
by the Census Bureau and the Department of Housing and Urban Development
(HUD). This report breaks out building permits issued, housing starts
and completions. It is an important leading indicator in that
construction activity tends to pick up early in the expansion phase of
the business cycle. However, it lacks qualitative information in that it
ignores the sizes and prices of the homes it counts.
10.Conclusion
So, Trend analysis examines data to determine if certain actions or reactions occur in a Patterned Market Trend. Trend analysis helps traders and analysts in a different way as they attempt to make predictions about Market Direction and Price Movements. But all works good when you have the right quality of Data Feed into the Analysis Platform. If quality of real time data feed is not up to mark then the analysis becomes more or less insignificant and highly risky. There are many Real Time Data Service Providers in the country but very few are among them who really maintains quality standard. Some companies like Rtdsdata.com are very good when it comes to maintaining quality standard. Besides the fact of real time data, there is also another factor of Data Recoverability that plays a vital role as well in analysis. Lost Data or Gaps in data will act as a barrier towards effective analysis. Such vital factor should not be neglected and thus Service Providers like Rtdsdata.com are gradually becoming very popular when it comes to maintaining parameters like Quality, Data Recoverability, Prompt Technical Support. So traders will have to be very cautious while choosing the right Data Service Provider.
