How to Forecast the Stock Market

There are many techniques to use to forecast the stock market. However, experts often say that, regardless of technique, accurately forecasting stock market performance is more a matter of luck than technique. Having an expectation of how the stock market might perform, nevertheless, is important in giving you a base for making your investment decisions. Using different analysis techniques and comparing the results might improve your chances of accuracy, but it is usually unexpected events that change market sentiment and disrupt the internal cohesion of even your most logical forecasts.

Step 1

Employ economic analysis, including estimates of trends in the economic indicators and in the direction of Federal Reserves monetary policy. This gives you a hint about the likely overall direction of the stock market. For example, if the Fed will be raising interest rates to slow a booming economy, the stock market might drop. If the Fed is keeping interest rates low, pursuing an expansive monetary policy to spur a recovery from recession, the stock market might rise.

Step 2

Apply technical analysis of stock index price movements. Use short- (5 or 10 days), medium- (20 to 100 days) and long-term (200 days) moving averages and watch for them to cross over major trend lines. Trend lines are defined by drawing a line that intersects the major highs or major lows of the chart. A moving average crossover might indicate a change in trend direction. Other technical analysis tools that hint at directional changes are increases or decreases in volume.

Step 3

Use fundamental analysis to decide if major companies are likely to report good earnings. Some companies become the bellwethers of the marketplace. They are often reported in the financial news and are generally companies with the highest market capitalization or have a reputation for innovative consumer products. Analyzing their financials and business outlooks might help predict how their earnings will perform and how the broad market will react.

Tip

  • Consider the combined results of your economic, technical and fundamental analysis. The market is influenced by a vast number of things that include investor psychology, consumer confidence, geopolitical events and corporate news. Always examine your predictions in light of ongoing influences and modify them accordingly.

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