Perhaps one out of three of these corrections will turn into a decline of 20% or greater. I also know that historically about once every two years the market has a decline of between 10% and 20%. What I do know is that if interest rates go up, inflation will go up and the stock market will go down. “I have no idea what the market will do over the next one or two years. “I’d love to know what will happen in the future,” he said. I asked him if it’s possible to predict the market and he replied: “I’ve been trying to get next year’s Wall Street Journal for 40 years. Long-term investors, however, may find many technical indicators less than helpful.Ī few years ago, I spoke to Peter Lynch, bestselling author and legendary mutual fund manager. Even if you’re armed with a handful of reliable indicators, it’s nearly impossible to predict the unexpected, for example, when the price of oil or interest rates will rise, or when the next war may erupt.įor traders with short-term mindsets, indicators are invaluable. The market’s Holy Grail is still elusive, but many are still looking. What indicators can’t doĮven though indicators are useful for anticipating short-term direction, no one can consistently predict the market’s highs and lows and attach a date to it. While no indicator can tell you with 100 % certainty what will happen in the future, they can give important clues. VIX: Measures fear in the stock market by tracking implied volatility of call and put options.Ĭan these indicators predict what the market will do next? The answer depends on the time period: the shorter the period, the easier it is to have correct predictions. RSI or Stochastics: Helps traders determine if a stock or market is overbought or oversold.Īrms Index (TRIN): Helps traders identify overbought or oversold conditions.Īdvance-Decline Line: Helps traders measure how many stocks are participating in a rising or falling market.ĬBOE Put/Call ratio and ISEE Call/Put ratio: Contrarian indicators that track the buying and selling of options. New High/New Low: Tracks stocks that are making new highs or new lows.īollinger Bands: Helps traders identify overbought or oversold conditions MACD: Trend-following momentum indicator. Moving Averages: Helps to determine if a trend has ended or begun. #CATCHING TREND REVERSALS BY DAVID WEIS PROFESSIONAL#Even investors and professional money managers routinely refer to indicators for an unbiased second opinion.īased on the research I did for my recent book, All About Market Indicators (McGraw-Hill, 2010), here are a few trader favorites: They primarily use them to increase the probabilities that a specific trade will be successful. In addition to using sentiment surveys, most traders use one or more indicators plotted on a chart to help determine market direction. Suggestion: look for long-term trends in the sentiment surveys, not just one week’s results. Therefore, if you only rely on your emotions to trade or invest, more than likely, you’ll get it wrong. The reason sentiment surveys work is that humans almost always overreact when the market hits extremes. As you may recall, people back then were running for the exits, frantically selling stocks for the safety of cash or bonds. For example, in March 2009, these surveys were signaling extreme pessimism - which happened to coincide with the lows on the Standard & Poor’s 500-stock index and the Dow Jones Industrial Average. That’s when many traders consider doing the opposite of the crowd.Īlthough these sentiment surveys can’t precisely time the market, both have had uncannily reliable records of forecasting tops and bottoms. When these two surveys get frothy (over 60% bullish or bearish), it’s a signal the markets are becoming extreme. Two useful contrarian indicators, the American Association of Individual Investors (AAII), and The Investors Intelligence Sentiment Survey (II), measure the mood of investors. (MarketWatch) - Is it possible to predict what the stock market will do next?Īfter months of research and interviews with dozens of traders and investors, here are a few lessons worth sharing: Study sentiment surveys Commentary: Break out the Bollinger Bands, MACD and other trading tools
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