Reading The Market
First things first: Keeping in sync with the overall market trend is the fundamental pillar to successful stock-trading, since on average over 90% of individual stocks are ultimately going to follow the trend. This is without regard to the company, it's earnings, or even what the technical analysis of an individual chart may be saying. It's just statistics. In a nutshell, "you can't fight the trend".
Market Indexes
So how do we determine the trend? Swings in the broad market indexes usually coincide with swings in individual stocks, so the indices are the first thing to watch. Our proprietary buy and sell signals can pinpoint a change in trend to the exact day, and they work exceptionally well on the indexes because of the highly diversified patterns that results. I.e., any anomalies in individual stocks that would cause a false signal will be "averaged out". But, as a practical matter there's a little problem. These signals are based in part on the volume, as well as the price action, and market index data is notorious for having a spotty volume feed. It doesn't seem to matter which data vendor it is, the volume data for the indexes just isn't very reliable.
ETFs
Fortunately, another excellent source of insight is the so-called "ETFs", which are Exchange-Traded mutual Fund designed to mimic the performance (or with some ETFs it's the inverse performance) of a designated market index, such as the Russell 3000, or of a sector such as semiconductors".
We like to look at stock indexes and ETFs from a CANSLIM* cup-and-handle basing-pattern perspective, along with our proprietary Climax High and Climax Low signals, and also with signals such as new highs, up or down on big volume, etc. Also important is the Relative Strength Rank plotted as an indicator line, and the net Acccumulation / Distribution percentage.
For example, RWM is the symbol for the ProShares Short Russell 2000 ETF. This ETF moves exactly opposite to underlying market, i.e., when the standard Russell 2000 index goes up, the Short Russell 2000 EFT goes down, and visa-versa.
Note that there was a Climax Low buy signal in RWM (shown in blue a couple inches from the right edge of the chart) on June 11th, at what turned out to be virtually the exact low, and it started going up. Stocks started to sell off, seemingly right on cue. Then finally, over toward the right edge of the chart it had a genuine upside breakout from a cup and handle-style base formation, gapping above 60 (and above the 50-day exponential moving average, shown in blue) on big volume. You can see it on the chart. The pivot point of 59.26 was set on June 23rd, at the apex of the handle.
Additional noteworthy features with this chart are the Accumulation / Distribution percentage, which has moved into the positive zone at 56%, and the Relative Strength Rank indicator, which has been moving upward steadily as the cup-and-handle pattern formed. This all bodes well (if you can call it that) for additional declines in stocks.
Meanwhile, IWV is the symbol for the iShares Russell 3000 (long) Index. It's thrown off some Climax High sell signals lately (shown in red) that worked out pretty well. There have also been a couple of lackluster Climax Low signals, the latest of which failed almost immediately. This in itself is telling (as a contrary indicator - when the market immediately takes out a buy signal by breaching the low, we can usually take that as a sell signal).
As an example of a market sector ETF, SMH s the symbol for the Merril Lynch Semiconductor HOLDRS Trust. This fund represents a composite average of 20 major Semiconductor stocks. It's been doing reasonably well, forming an apparent base-on-top-of-a-base structure for the past several months after a failed breakout from a cup "without" a handle.
Specifically, the ill-fated handle-less cup in SMH began on February 10th (left edge of the chart) with a Climax High signal (shown in red). The maximum correction was 18.6% at the low of the pattern. Then came the Climax Low signal (in blue) which caught the exact bottom. The index rallied up off the lows to barely make another new high on March 23rd, but the breakout did not hold. More work was needed, since the cup was too deep and the requisite handle structure (with a more shallow correction) hadn't formed. It turned out to be the beginning of the extended base-on-top-of-base pattern we're seeing now.
Note the fractal-like cup and handle structure within the base-on-base that has emerged over the past several months from the more chaotic antecedent section. Like the original cup from earlier in the year, this cup began with a climax high which occurred on May 7th (marked in red). It corrected, than ran up to make a new high on June 1st (*supposed* to be marked in green, but I can see I need to capture a new chart with the new high paintbar applied - it was that big up day as it broke above 22). This marked the beginning of the current structure which we might construe to be a "handle". Note also how the 50-day XMA (shown in blue) has consistently served as a support level.
Leading Stocks
Maybe the best way of all to determine the market trend and catch the turning points is to watch the Leading Stocks of the day. These are the ones that are the strongest performers, and trade the biggest volume, are higher-priced, and are widely owned. These days the stock of Apple Computer (symbol AAPL) is one of the best to use as a proxy for the overall market. For example, on the chart below around the middle of July we saw the stock break out from a basing pattern to a new high, shown in bright green, and make a climax run-up. Meanwhile, the entire market staged a very sharp little rally. Then, perched atop the bullish streak came the big red sell signal. It proved to mark the exact top for the stock, and also the entire market went into a sickening sell-off, reminiscent of 2008. Then came the purple Pristine buy signal, and sure enough, the entire market rallied.
Notwithstanding ins and outs of chart-reading, the most fundamental point of all this bears repeating: The most basic prerequisite to successful stock-trading is to be in sync with the overall market trend, since over 90% of stocks will ultimately follow the market direction. Fighting the trend doesn't work!
*For those unfamiliar with the term, CANSLIM - among other things - is precise methodology for reading stock charts courtesy of William O'Neil, founder of Investor's Business Daily and author of How to Make Money in Stocks.