Yahoo Finanzen 7 Technical Signs to Spot a Market Rally
Making money in the stock market is objectively not difficult. Buy an index fund, sit back and wait. In the long run, you'll make a tidy sum.
But there's a problem with that strategy: It's no fun -- and it's less lucrative than actually beating the market. While long-term investors use a buy-and-hold strategy, most short-term investors use technical analysis -- studying charts to figure out where the market's headed. If done correctly, a trader can get a legitimate advantage over other investors.
Here are some of the key signals to look for that indicate a bullish trend is at hand.
Fifty-day moving average nears the 200-day moving average. Moving averages are a vitally important part of technical analysis for reading the stock market. They tell traders average asset prices over time, giving them a better idea of market trends. The 50- and 200-day averages are two of the most popular to use. When the 50-day average crosses above the 200-day average, it's a convincing signal that short-term momentum is starting to build, and the bulls come out to play. Traders can design custom indicators by using different moving averages, but it's always bullish when the shorter-term average crosses the longer-term one.
[See: 8 Stocks to Buy For a Starter Portfolio.]
Weighted put/call ratio. Sometimes looking to the options market can be a good way to tell where equities themselves are going. When the put/call ratio is high, options traders believe the market is overvalued. That's what happened when the weighted put/call ratio soared above the 1.6 level in late December. You know what happened next: 2016 began with the worst 10-day performance Wall Street had ever seen. Markets are more stable when the put/call ratio stands at a reasonable 1.0.
The Standard & Poor's 500 index hits a yearly high. Be grateful: Other than "momentum," there's not a fancy-shmancy name for this one. The S&P 500 index broke through 2,100 for first time this year on April 19. The next day, it reached an intraday high of 2,111, about 1 percent below its 52-week high (and all-time high) of 2,134 last July. Reaching new highs for the year is seldom regarded as a bearish indicator. When the benchmark index is reaching higher highs and higher lows, short-term investors know the rally is on.
Bollinger Bands. Technical traders frequently use Bollinger Bands to determine when to enter and exit a trade. Invented by the market technician John Bollinger in the go-go days of the '80s, there are three basic features of the Bollinger Bands. The middle band shows the 20-period simple moving average, and the upper and lower bands set two standard deviations away from the SMA. When a stock approaches the upper band, it's overbought; the opposite is true when it approaches the lower band.
[See: 8 of the Most Incredible Investments of the 21st Century.]
Keltner channels. Like Bollinger Bands, the Keltner channel is a trading tool technical analysts look to when determining whether a stock is overbought or oversold. The middle line is computed by taking the 10-day SMA of the "typical price", which Keltner defined as the average of a stock's daily high, daily low, and closing price over that period. Then, the 10-day SMA of the high-low range is added (and subtracted) from the middle line to define the upper (and lower) channel lines.
TTM squeeze on S&P 500. The TTM squeeze measures the relationship between Bollinger Bands and the Keltner channel, constituting a "superindicator" of sorts. Both Bollinger Bands and the Keltner channels give traders upper- and lower- moving average bands; in each case, when the upper band is breached, stocks are overbought, when the lower is breached they're oversold. The TTM squeeze tells traders when both Bollinger Bands trade between the outward Keltner channel bands, indicating lower momentum. When the upper Bollinger Band breaks from that range, it's a bullish indicator.
[Read: The Incredible Shrinking World of Investments.]
Moving average convergence divergence. Also called MACD, this is one of the more popular indicators that technical analysts use. Like the TTM squeeze, MACD measures the difference between two other figures, this time subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. This is plotted over the "signal line" formed by a nine-day EMA of the MACD. The MACD is a momentum indicator, so when it breaks above the signal line, it shows positive short-term momentum, and vice versa.
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