There are two types of analytical approaches when investing in the stock market. One is a fundamental approach. The fundamental approach is based on trying to understand company earning reports, deciphering the meaning of any economic reports and their impact on the stock market or the stock itself, and company news that can move the individual stock up or down. The other approach is called technical analysis. When you use technical analysis, you are dealing with charts that monitor patterns of the price and volume action of the stock. Both approaches are good; however one approach will give you a heads up of changes before any news comes out. And that is technical analysis. You can also use both methods when talking about the stock market in general.
The reason I'm writing this article is for those who typically put their money into the stock market without understanding why they are doing this. The other reason is to demonstrate a potential critical turn that could happen in the stock market by applying my favorite and only method, technical analysis. This critical situation is what traders call a "trend line break".
What is a trend line? A trend line is a tool that traders use when trying to see a trend in the stock market or a stock. To simplify it, it's a line drawn connecting all supports and resistances in a direction during a period. You can read more about trend lines by clicking on "Definition of Trend Lines". If the movement of the stock market or an individual stock penetrates the supports or resistances, it becomes either a buy or sell signal. A buy signal is when the movement penetrates the top line and a sell signal is when the movement penetrates the lower line. Now, many traders go into more details with trends. However, for the average investor who prefers to invest long term, a good suggestion is to monitor your market long term trend.
Below is an important chart that displays how we are still in the long term trend of the stock market however we are testing supports for a 33 year trend in the stock market. Click on "Chart" to observe this trend. This chart is from December 31, 1974 to November 30, 2007. To simplify this, if we break the lower line and do not recover, watch out for years to come. That would suggest the end to the bull market and a long term bear market would have begun. Are we there yet?
Well, as of writing this article, no. Stay tune for more information on the direction of the market.
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