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Assess the Direction of the Market

stock market

The stock trader who works a full time job must make the best use of limited time, typically in the evening and often taken away from time with family or other enjoyable pursuits. A previous article discussed stock chart research. Another task for the part time trader is to study the overall market, assess what is happening, and use this (in conjunction with other factors) to determine what types of trades to place.

Why is Market Direction Important to Assess?

For the part time trader who trades individual stocks, and who watches those stocks according to the practice of technical analysis, the benefit to overall market direction assessment may not be immediately obvious. However, there are good reasons for the trader in individual stocks to assess market direction.

  • At least 70% of all stocks move in the same direction as the overall market.
  • The beginning or ending of a stock’s trend will likely coincide with the market (at one end of the trend or the other.
  • The trader can fine-tune the individual stock trade once a change in overall market sentiment is evident.
  • Overall market direction can be used for scaling in and out of trades.

How Can Overall Stock Market Direction be Assessed?

Several financial organizations have developed “indexes”—groups of stocks that are somehow related and are tracked over time. The most famous of these is the Dow Jones Industrial Average, which is thirty large stocks. Others that most often make the news headlines are the NASDAQ indexes and the Standard & Poors Indexes. The following is a broader list of indexes that can be used together to look for changes or continuation of market direction.

  • S&P 100 – the 100 largest publically traded companies in the USA
  • S&P 500 – the 500 largest publically traded companies in the USA
  • S&P 600 – an index of 600 smaller stocks
  • Russell 1000
  • Russell 2000
  • Russell 3000
  • Dow Jones 30 Industrials
  • Dow Jones Transportation
  • Dow Jones Utilities
  • NASDAQ Composite
  • NASDAQ 100