A successful stock market strategy begins by knowing how the major averages are acting. Most stocks, 80% is the number most often quoted, follow the major averages. If the averages are trending (making higher highs and higher lows) then you can reasonably expect the same for your stock selections. Conversely, if the market is trading ( no perceptible or strong move either up or down) don’t expect most stocks to take-off and run to new highs.
Here are a couple of ways to determine the direction of the market — from this information you’ll be able to employ the correct stock market strategy.
Pull up a chart of the averages and look at 3 months price data. Shrink the price bars and have a look at the last year. Now you’ll have a clearer picture of the market’s direction. If any doubt remains, draw a line that traces the direction of the price bars.
If you’re still unsure about the direction, try this — see if you can contain the last several bars within a box. If you can do that then the market is probably ______________. Hint: the answer is in the first paragraph. Here’s a current screen shot of the S&P (click to enlarge)–
Another technique is looking at different time frames. Here’s the same S&P chart on an hourly and a 30 minute chart. I’ve put an ellipse within the box to show how price is currently tracking. With the exception of a few outliers the price is currently ___________.
To deploy a profitable, successful market strategy go where the market wants to go. Now would not be the time to use a trending strategy — the market wants to trade.
If you have a strategy for a trading market and feel comfortable investing in these conditions, now is the time to use it.
P.S. If you’re looking for new tips, techniques, and strategies, watch the sidebar on the right side of this blog. I’m posting mini-courses — it’s a peek inside my trading toolbox.
Don’t drag your feet — enroll in the current mini-course at the box on the right because I’m going to take it down, soon.
