Here’s a Key Stock-Market Indicator to Focus on Now
Why it's a good idea to keep your eye on the market's momentum readings
by Bob Stokes
Updated: May 12, 2020
Many people who invest in the stock market have a general idea as to when to get in -- for example, "buying on the dip" -- but not so much when to get out. In fact, they tend not to, even after suffering steep losses in a bear market.
Some investors are more active and watch various indicators to help them make both buying and selling decisions. The list of indicators is long, and they broadly fall into two categories: the so-called market fundamentals -- what you hear a lot on TV, things like the economy, earnings and so on. And then there are technical analysis indicators; these tools don't focus on factors outside the market and instead look at the market's internals.
A classic Elliott Wave Theorist identified the three most important technical analysis indicators:
The three pillars of market analysis and forecasting are [price] patterns, momentum and sentiment.
All three are highly relevant here in May 2020.
Right now, let's focus on momentum and an instance when our analysts used a momentum reading to anticipate what was next for the stock market.
Let's go back more than 12 years to a chart from our Oct. 2007 Elliott Wave Financial Forecast and the accompanying commentary:
One strong reason to view the current market rally as corrective is the behavior of the advance-decline line... While the DJIA has retraced approximately 92 percent of the decline from the July high and the NYSE Composite Index 87 percent, the NYSE advance-decline line has retraced just 42 percent. In other words, the rally is narrow, as the majority of NYSE stocks are underperforming.
Less than two weeks later, the DJIA hit its historic 2007 top.
Fast forward to this chart from our May 6, 2020 U.S. Short Term Update:
Since the start of the March 23 rally, notice that the peak advance-decline line in each successive wave is lower than the previous one.
The bottom line on the chart shows that volume has also steadily declined during the rally.
Beyond momentum considerations, as inferred a moment ago, our Elliott wave experts are also studying the stock market's price pattern and sentiment gauges.
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The Stock Market Never Needs a "Reason" to Make a Sudden, Big Move
The history of the stock market is clear: big price moves have indeed happened on days when there was no big news.
What's more, many trading days have moved contrary to the headlines: In other words, stock prices rose after bad news, and fell when news was good.
Ever wonder why?
Put simply: News and events do not drive market trends. Yes, the market might have a brief emotional reaction, but then the main trend picks up where it left off.
You see, investor psychology is the real driver behind stock market trends -- Elliott waves directly reflect this psychology.
Learn what our experienced Elliott wave experts are saying about the stock market's next big move, so you can prepare.
You have a full 30 days to discover the charts, analyses and forecasts in our flagship investor service with zero obligation.
Simply follow the link below and you’re on your way to tapping into the insights of our veteran stock market analysts.
You can greatly boost your confidence in an Elliott wave count when you combine it with a popular technical indicator like the Relative Strength Index. Log in -- or sign up for FREE -- to watch our "How to Win in FX and Cryptos" course instructor show you how in this quick video.
Investor sentiment is one of the bedrocks of market trends. A sub-trend of the broad sentiment is that of "the little guy," the small traders. Watch our Global Market Strategist explain what the current "little guy" sentiment tells you about the market's next move.