Going With The Flow Of The Overall Market

Going With The Flow Of The MarketGoing With The Flow Of The Overall Market

There are many great traders and investors who had one mantra in common: follow the trend of the overall market.  In other words, if the general index is in an up trend and a bull market, it is a good idea to avoid shorting stocks.  If the general index is in a downtrend and a bear market, it is a good idea to avoid buying stocks.  I know it sounds simple, but you would be surprised at how many people still buy more stock in a bear market, and then sell all their holdings for a tiny profit whilst a bull market is still raging.

The Masters Speak For Themselves

Jesse Livermore, reputedly the subject interviewed in “Reminiscences Of A Stock Operator” written in 1923, declared:  “I was bullish on the market, and the only thing to do when one is bullish on the market is to buy stocks.”

Or, more recently, market wizard William O’Neil, author of “How To Make Money In Stocks” (and interviewed in Jack Schwagger’s original Market Wizards book) said “3 out of 4 stocks will follow the overall market”.  This is an excellent rule, and it means that while there is the chance you will find the odd stock that bucks the trend, the highest probability trades are those that run with the overall market.  And that’s what we are looking for – high probability trades.

So how do we make sure we are following the overall market in our trading?  It’s easy – we can use the same techniques we have learned to trade stocks on the indices like the All Ords or S&P Top 200 in Australia, or the Dow Jones Industrial Index or S&P 500 in America.  (If you need to brush up on your market analyzing skills, why not try the free course on trading and investing here).

How I Analyze The Overall Market

Below I will list some of the techniques that I have found most useful in analyzing the indices.

1:   I have found that using Trend Lines on a daily chart will give an early indication of a trend change on an index.  For instance after the bottom in March 2009, we were alerted to a new short term uptrend within days by using simple trend lines.

2:   Trend lines can also alert you to areas of potential resistance or support in the future (to learn more about using trend lines for predictions, click here).

3:   Using Trend Lines on a longer timeframe will alert us to when a solid bull or bear market will start also – when there is no more trend line resistance hanging overhead, then the path is clear for the market to really head skywards.  Likewise, when there is no trend line support holding the market up, the market is free to plummet strongly.  We saw this in May 2003 on the S&P Top 200 – while a bull market was confirmed on a daily chart in March 2003, soon after in May we got the really solid longer term confirmation – and one of the biggest bull markets of the last century.

As you know, I love my pictures, so check out what I mean by clicking on the examples below:

Starting a Bull Market

Market Analysis - Bear market 

 

 

 

 

 

 

 

Did you notice in April 2003 how the market consolidated just below the longer term trend line?  Magic.  Of course if you don’t want to analyse the market yourself, the news usually will tell you when we are entering a bull or bear market.  Think recently of the “green shoots” in March 2009, and then “Black Tuesday” in January 2008.  I wouldn’t trust the news myself, but it’s there if you need it.

Investing should be fun, and in no way should it have us tied to a computer all day.  By knowing where the overall market is before you invest, you can do it with more confidence, less stress, and less time tending to your investments.  This leaves you more time for family, friends, and adventures.  It is a good life after all, and we should enjoy it!

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July 13, 2009  Tags: ,   Posted in: Free Trading Course Lesson Backlog

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  1. Trading Diary Update March 2010 | ASX Market Watch - March 28, 2010

    [...] this week have been GMG and BEN.  I’m trying not to take on too many new positions until the overall market makes its direction clear – and as you saw in this week’s Market Watch the ASX Top 200 has that resistance at [...]

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