Trend in the Stock Market

Everyone who has been trading even for only a short time has heard the adage the Trend is your Friend. If we are trading against the trend we are like salmon swimming upstream. However we should not only know the trend of the stock because a stock will often move in sympathy to how the overall indexes are moving. So first we must identify the trend of the indexes. Then ideally if we can find an industry moving in the same direction of the index we would like to pick a stock from that industry to trade. For example if the S&P is trending up and the overall banking industry is moving up we could purchase stock in Wells Fargo (WFC).

1.Identify the trend of the overall indexes (the S&P, Dow and Nasdaq)
2.Identify the trend of an industry.
3.Identify the trend of an individual stock within that industry.

How To Identify The Trend
There are many different ways to identify a trend. The method we use for determining the trend on an index or industry is looking at the Weekly Charts. When the market breaks above the highest high of the past 3 weeks then we say that the market is in an uptrend. If it has broken below the lowest low in the past 3 weeks then it is in a down trend.

For an individual stock we use the monthly charts and if it has broken above the highest high of the past 3 months then the stock is in an uptrend. If it has broken below the lowest low of the past 3 months than it is in a downtrend.

Technical Analysis Vs. Fundamental Analysis- Technical analysis is the study of price action and timing to enter the market. Fundamental analysis is the use of information about the company's financial condition to make investment decisions.

These are two different and often competing schools of thought where one school says that the other is wrong. At OptionSpreadTrades.com we believe that both schools are right, but give us different information. A useful way to think of it is the fundamentals will tell you Why a stock is moving and the technicals will tell you When the stock will move.

Technical Analysis
There are entire books written on technical analysis and it is beyond the scope of this course. Some of the tools that we use at OptionSpreadTrades.com are things like overbought and oversold indicators like Stochastics, Momentum indicators and Bollinger Bands, which are standard deviations to tell us when a market is going to reverse direction.

Fundamental Analysis
This school looks at things like price to earnings ratios, the amount of debt a company has, and earnings per share to determine the value of a company. It is important to look at both technical and fundamental factors when deciding which stocks to buy or short sell. Because if you buy a stock that is technically ready to move up it is better to purchase one that also has good fundamentals as well because this makes it likely that the stock will move up more than one that doesn't have good fundamentals.

Summary
1. Identify the trend of the overall indexes (the S&P, Dow and Nasdaq)
2. Identify the trend of an industry.
3. Identify the trend of an individual stock within that industry.
4. Technical Analysis tells you when a market will move
5. Fundamental Analysis tells you why a market move.
6. All of these factors are important for deciding which stocks to buy or short sell.