How to Use Market Timing Indicators for Stock Picking
Picking winners in the stock market is as much about timing as it is about picking good stocks. You can buy a good stock, but if the timing is off, you may not make money on your investment. Market timing indicators can be effective tools, especially if you use several to validate each other.
“A rising tide floats all boats” is an expression that has some validity for the stock market. It is certainly easier to pick winners in a bull market than in a bear market. To see which way the market is going, start with the S&P 500 moving average. If the S&P index closes above its moving average, the market is likely to be bullish. Closing below the moving average is a bearish indicator. The advance/decline ratio, which tracks the number of stocks increasing in value vs. the number declining, is another general market indicator. If the ratio is positive and rising, the market conditions are likely to be good for investing. If the ratio is negative and declining, the conditions are deteriorating.
Moving averages are handy charting tools to determine buy and sell points. Plot two moving averages – one long and the other short. Which you use depends on your investing time horizons. You could use the 50-day and 20-day moving averages for a good medium-term indicator. When the short moving average crosses the long-term from below, the short-term trend is strong, and the stock is a buy. Conversely, when the short-term average crosses from above the long-term average, the stock is a sell.
Candlesticks are plotting diagrams to track stock price movements. An individual candlestick looks like a candle with a wick protruding from each end. The wicks show the high and low, while the candle itself depicts the opening and closing prices. The candle is white if the stock closed up, black if it closed down. Different patterns reveal trends and turning points for the stock. It takes practice to learn how to identify and use the patterns, but they can be quite revealing. Candlesticks can be used for day trading, swing trading or long-term investing.
Momentum indicators tell you whether the stock movement is accelerating. One of the more popular momentum indicators is the Moving Average Divergence Oscillator. The indicator has two components – the first is the difference between two-day and 26-day weighted moving averages for a stock. The second component is a nine-day weighted moving average. You have a buy signal when the first crosses above the second, a sell signal when it crosses below. These signal points are easy to identify with good charting software.
Thomas Metcalf has worked as an economist, stockbroker and technology salesman. A writer since 1997, he has written a monthly column for "Life Association News," authored several books and contributed to national publications such as the History Channel's "HISTORY Magazine." Metcalf holds a master's degree in economics from Tufts University.