In this article, I’m going to show you how to analyze the stock market…
The method I’m giving away will help improve your day trading technique, as well as improve your overall success.
The first thing I teach traders when learning how to analyze the stock market is to look at the big picture and work their way down from there.
When analyzing markets from a long-term view, you gain insight into past trading history and, more importantly, clues as to how the market may behave in the future.
The first thing I usually pay attention to is the current conditions of the underlying market. In other words, I want to see if the market is trending or range-bound.
Once I determine the current trading characteristics, I immediately look back to see when the market exhibited the opposite characteristics.
How to Analyze the Stock Market: Remember the Golden Rule
One of the most important rules every trader should know when learning how to analyze the stock market is the longer the market trends and exhibits one-way momentum, the higher the odds a range-bound period is approaching.
The longer the market is trendless or range-bound, the higher the odds that strong directional momentum is approaching.
There are exceptions to this rule. But when you typically see a long trend that lasts for several months, you almost always see a trendless consolidation period immediately after the end of the trending cycle.
When markets are range-bound for extended periods of time, a strong breakout accompanied by volatility and momentum usually follows this pattern.
How to Analyze the Stock Market: Apply to Different Time Frames
The markets are usually driven by people, and people are driven by emotion.
This pattern tends to apply across stocks, futures, commodities, currencies and most other financial markets…
And the pattern of alternating between range-bound and momentum tends to apply to different time frames as well.
Notice in the example below how Hyatt Hotels Corp. (NYSE: H) alternates between range-bound and trending periods. Once you start paying attention to this pattern, you’ll begin taking it into consideration when planning your entry and exit strategies.
In this example, you can also see how this pattern applies to intraday price fluctuations. You always have to keep in mind that markets are driven by emotion.
This will help you gain a better perspective of how markets really work and what’s behind each move. But also keep in mind that there’s some correlation between the length of time of each stage and the following stage.
In other words, if the range-bound stage lasted two months, odds are the trending momentum stage or cycle will also last a few months.
How Can You Benefit From Alternating Cycles
Once you become aware of alternative trading cycles, you’ll begin to look and learn how to analyze the stock market a bit differently.
Not only will you pay attention to what the market’s doing, but you’ll also start looking at the past few cycles to gain clues to help you determine how long the current cycle will last.
When you see the markets changing from one cycle to the next, you should reconsider how you trade that market and the type of strategies that are working in the current cycle. Once the cycle changes, the techniques that worked in the previous cycle will not work in the current cycle.
Therefore, you must adjust your trading style and learn to trade both trending and range-bound trading cycles.
How to Tell If Current Cycle Is Ending
There are many clues the markets provide that can alert us to changes in market cycles.
For example, when the stock market changes from trending to range-bound, both volume and volatility drop.
When markets are beginning the trending cycle, the lows of the day usually occur in the mornings, and the highs of the day typically occur toward the closing bell.
I hope this short tutorial on how to analyze the stock market helps!
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All the best,
Senior Strategist, WealthPress