Spot A Stock Trading Market Top And Bottom...
Whether markets are making new all-time highs or 52 week lows, stock market investors are always trying to pick the top or bottom. I intend to lay out a simply way for investors and stock traders to spot a stock trading market top and bottom. Investors need to recognize that fear and green drive the stock market. This means that stocks can fall much more than anyone expects, just like stocks can continue to move higher for longer periods and much more than anyone expects.
To spot a stock trading market top and bottom there are key rules to follow. The first one is, you need insane greed or fear. When a stock market is making new 52 week highs, an investor should constantly hear bullish commentary in the media and from their friends. It should be to such a level where it begins to make you (the investor) begin to question yourself and your logic. The same thing applies to the downside. When a market is making new 52 week lows, bearish sentiment should be at an extreme. The media should be panicking and your friends should be crying and selling their positions. You (the investor), should be scared to buy.
Next, smart stock traders and investors should be following volume closely. As a market hits new 52 week or all-time highs volume is usually light until institutions start to sell. Then volume can increase dramatically. Couple abnormally higher volume near/at the highs as an indicator that big players are unloading to smaller investors who are buying. This is called distribution. When a stock or market is collapsing hard, at 52 week lows and insane panic is gripping things, look for an extreme amount of volume. This should be a multi-year high in volume and signals big boys buying while smaller investors throw the baby out with the bathwater.
Lastly, the confirmation of a major stock trading market top or bottom is reversal. Extreme greed and fear, plus heavy volume should yield price reversal. For example, if a bottom is in the market or a stock, price will likely flush initially on extreme fear, volume will surge and weak hands dump and big money buys, then price will reverse. Often a bottoming tail or reversal candle will form. This confirms the stock market bottom. Investors and traders can also look for stock or stock market tops by following the extreme greed and surge in volume, followed by a price reversal to the downside. This often will put in a topping tail or reversal candle.
When these three indicators are seen, investors and stock traders can bank on a market top or bottom.
Gareth Soloway
Chief Market Strategist
InTheMoneyStocks.com
AI
