Use the daily charts of major market averages published in The Wall Street Journal and many local newspapers to forecast stock market reversals. Major clue: A gap between the bar line of one day's trading and the next, an area where no trading took place. We also wrote on Run Personal Finances Like a Business.
The gap represents an area through which prices are likely to move on the next market dip or rise. If the most recent gap was formed during a market advance, there is a good chance the gap will be filled during a subsequent market decline. If a gap was formed during a recent market decline, it will probably be filled during a subsequent market advance.
If a gap occurs following an advance or decline that has already lasted for several days, and the market then pauses, expect an immediate market reversal back through the gap. Gaps formed on the first day of a market reversal often signify a strong move.
Stock Market Forecasting Through Technical Analysis
What is technical analysis? A discipline that focuses on the action of the stock market, as opposed to the earnings and dividend outlook for individual stocks. Assumption: The knowledge and future expectations of all the market participants are already reflected in the price, Key goal of technical analysis: To monitor the major trends and try to identify a major reversal or end to the trend. The reason it works: Price levels reflect not what stocks are worth, but what people think they are worth.
READ ALSO: It Really Pays to Ask Questions
The strengths of technical analysis: For one thing, it allows you to make money without inside information or the input of the top research analysts. The charts of the price action of a specific stock tell all. What's more, an individual can follow a wide range of stocks, industry groups, commodities, and foreign stock markets with the aid of technical analysis. To study the fundamentals of each one of those markets, you are limited to a few of them
By looking at the price pattern, you also get somewhat of a feel for how big a price move might be Fundamental analysis cannot do this for you. For example, The Dow Jones industrial average built a base below 1000 for 15 years. When it finally broke through, the resulting move was an extraordinarily large one, expected Technical analysis can tell you at what point to buy and sell a stock. The key: Where the stock has found support or met resistance in the past
The limitations of technical analysis: It is not a science, but an art. It doesn't lend itself to precise formulas. Indicators work most of the time, or some of the time, but certainly not all the time.
The most frequent mistake in technical analysis: Investors anticipate a buy or sell signal before it actually happens. They lose patience and objectivity. The way to avoid this is always to let the market do the talking.
Dow signs of a breakthrough: A substantial number of stocks (at least 250 to 300 of them) hit the new-high list.
• Volume runs in excess of 60 million shares a day
• Interest rates clearly peak and head down. The action of the stocks on the Dow Jones industrial index is confirmed by strong moves in the utility and transportation averages. Source: Martin J. Pring, consulting editor, The Bank Credit Analyst, and author of Technical Analysis Explained, McGraw-Hill Inc., New York.
Please check How to Evaluate High Technology Stocks for more insight.
Four Key Indicators
In the 19 years that I have been writing the annual Stock Trader's Almanac I've found a number of indicators that are among the most effective in predicting the direction of the stock market:
The January barometer: This is one of the best. If the stock market as measured by the Standard & Poor's 500 index goes up for the month of January, it will probably advance for the rest of the year. The January barometer has worked almost 85% of the time since the "Lame Duck" amendment and the end of Roosevelt's lopsided majorities in Congress in 1938. In odd-numbered years it has not been wrong since the late 1930s.
However, although this indicator is effective for the direction of the market, it does not tell you about the intensity of the market's rise. In recent years the January market moves have been much larger than in previous years. I think this is because people anticipate the rise, and the market has become dominated by institutional investors who get influxes of money and put it to work then.
The September reverse barometer: If the market declines during that month, I have found that the reverse happens for the rest of the quarter and especially for the next year. Since 1960 there have been 16 Septembers with declines. The stock market has gained 12.1% on average the year following a September decline. The two exceptions: The market showed losses in 1973 and 1962, neither of them recession-induced. The 1973 decline was caused by OPEC. In 1962 the business world was shocked when President Kennedy stared down Big Steel.
The four-year cycle: For the last 150 years, the stock market's performance has been tied to the Presidential elections. If you take the last two years of every Presidential term going back to 1832, the cumulative return of the reelection and the election years (the total for all those 78 years) is 497%, compared with only an 8% gain for all the post-election and midterm years from 1932 to the present. In other words, the President tends to do business in the first two years of his term and then starts getting ready for the election. Good stock market performance tends to come in the third and fourth years of a Presidential term.
The October bonanza: October has become
a great buying point for investors. It comes before three of the four months that have the biggest stock market returns. Since 1950 the market has, on average, gained 4.5% from November through January. It looks as though anyone who invested around Halloween won't be hurt.
Always remember: It Really Pays to Ask Questions.
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