Ways to find the trend of the market

THE trading performance of the market last week may likely set the tone of its direction not only till the end of the month but possibly until the end of the second quarter.

A lingering concern that might send global equities of the free world markets into sideways to downwards fashion has re-emerged.

Wall Street, too, last Friday seemingly started to succumb to this pattern as investor’s confidence was once more eroded by fears that “the financial troubles of Europe were more serious than previously thought.”

This new factor may once more add difficulty to our grasp on the order of play and direction of the market than it already was.

52-week high/low

Taking note of the high and low of the market is one way of probing the market’s underlying direction and, most importantly, the intrinsic value of stocks. One such technique is the so-called 52-week high/low.

This technique is done by taking the highest and lowest price at which a stock or market had traded in the past 12 months or 52 weeks. By itself, it serves as an important trend indicator.

For example, a stock trading at its 52-week low could signal a possible value play. The 52-week low of such stock could serve as an initial indication that it is—possibly—sitting at a price below its intrinsic value.

There are certainly other things involved in determining whether a stock is trading below its intrinsic value or not. A lot more analyses have to be done to arrive at this conclusion.

Nonetheless, the 52-week low can serve as an initial indicator to finding stocks trading under their intrinsic values.

The same is true with stocks at their 52-week high, which can initially indicate that a stock could be already selling above its intrinsic value. More profoundly, it can as well serve as a signal that the stock is at a breakout point at which its intrinsic value may have gone higher.

The 52-week high/low principle takes its roots from the so-called “High-Low Index,” which has been devised to provide confirmation on the trend of a stock or market “by dividing the number of high stocks and low stocks by the total number of trades on that day.”

At present, market technicians use a moving average on the data to smooth out the daily price swings since the index can be quite volatile on a day-to-day basis.

The high-low index is considered bullish if it is positive and rising. It is considered bearish if it is negative and falling.

Advance/decline index

This index is considered one of the best indicators of market movements. It represents the total difference between the number of advancing and declining security prices. Stock indexes like the PSEi only tell us the strength of 30 stocks, whereas the advance/decline index can provide much more insight into the movements of the market.

The general theory of this index is that if the market is up but there are more declining issues than advancing ones, it’s usually a sign that the market is losing its breadth and may be getting ready to change direction.

When plotted on a chart, this index is known as the “advance/decline line.”

Market breadth theory

This model is a predictive tool in gauging the direction of the market. A large number of advancing issues is considered a sign to confirm a broad market uptrend.

When there are more stocks that are advancing than are declining, the market is considered strong or positive. In this case, the market is expected to rise. In stock market parlance, this suggests that “bulls” are in control of the market’s momentum. The reverse is expected if more stocks are declining or a disproportionate number of stocks are declining.

As a rule, the numbers of stocks that have created a 52-week high in comparison with the number of stocks that created a 52-week low relatively provides the basis as to whether the bullish or bearish trend of the market will continue.

McClellan Oscillator

The McClellan Oscillator is a modification of the market breadth indicator that is based on the difference between the number of advancing and declining issues.

It has two significant postulates: When the market continues to appear healthy but is actually driven by a big number of small stocks, it is in reality weakening. Likewise, when a smaller number of stocks are declining in a bear market, the end of said bear market is most likely near.

Bottom-line spin

The market was up 73.04 points on a weekly basis; a big contrast to what it was the week before.

But following the major principles of the foregoing models used to measure breadth and direction of the market, it is actually declining as corroborated by the increasing amount of selling transactions by foreign investors.

Considering last week’s market performance, the immediate support of the market will continue to be at the 4,170 of the PSEi while resistance may continue to stand at 4,344.

To be more assured of your trading plays, pay close attention to the direction of the market by using the above described market models.

(You may reach the Market Rider at [email protected] or directly at www.kapitaltek.com.)