As a trader, I live by several mantras. One of the most important is “searching for a market top or bottom is a loser’s game.” However, you can learn how to spot a change in stock market direction without trying to perfectly time the markets.
Traders who do try to time markets end up wasting a lot of time and often miss out on great trade opportunities.
To time a market top or bottom, you need to be extremely accurate and very lucky. It’s like throwing darts at a board while blindfolded – and unsure of which wall the dartboard is even on.
Pay attention to change in stock market direction
Instead, you want to pay attention to a change in stock market direction. This allows you to take advantage of a new trend and place some winning trades.
As is so often the case in trading, this is easier said than done. Most traders panic when a pattern breaks. When stocks are in an up trend, we tend to ride out the trend much longer than we should. The same goes for a down move.
But when stocks are just starting to roll lower from a prior uptrend or curl upwards from a downtrend, isn’t that a good time to shift gears and place a trade in a new direction? It all depends.
There is not much in the universe of market fundamentals that will help you determine when a trend is over. Stock valuation can remain high for some time. Who knows when the big money players will say, “It’s time to sell.” Trying to predict that moment is futile.
Watch these technicals
Yet, in the technical universe, you can find solid evidence that a trend is changing.
Momentum indicators such as the MACD, relative strength, and money flows, tell you whether money is flowing into or out of stocks.
Price action and volume, the primary indicators, are ideal tools, as long as you’re not biased with your positions.
Supporting technical indicators, like put/call ratio, breadth indicators (the McClellan oscillator), sentiment tools, new highs/lows, and simple candlestick charting patterns, provide great visuals of what is happening.
When a stock market breaks support levels following a long up move, makes lower highs and lower lows, and shows higher volume trends on down days, you will know that a market uptrend is in jeopardy.
There is no guessing here. Simply look at the technicals and notice when price is starting to weaken. At this point, it is time to shift gears and make a contrarian play. When traders are too confident or too fearful, it’s time to trade the other way.
