StockTradeTiming.com
An Historical Stock Simulator, Maximizing Profits by Spotting Trends

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Volume:
The market moves up and down because of buying and selling. Investors quantify the amount by a term known as volume. Volume is the number of shares that are being traded. If volume is high on days the stock closes up money is flowing into the stock, institutional investors are buying. If a stock is down with low volume that generally doesn't mean much, it should rebound. But if the stock is beginning to go down on higher volume than the day before, let's say 30% more volume, than the stock usually will go down further for the next few days.

Market Top:
For larger market movements it takes longer than just one day of distribution. William O'Neil suggests that three to five days of above average volume (30% or more) on days where there is more selling than buying within two to four weeks is enough to shift the market into a bear season.¹ It also can happen as the market is ascending but fails to reach new high ground when there is significant volume. This is called stalling. But beware, timing the exact moment of a decline is very difficult, stocks can continue to rise or hover for long periods of time. As a beginner be content with a broad sense that the market will soon shift and make your movements at around the right time.

Stocks very often display what's called a climatic top. Which is the phenomenon when a stock will rise higher and faster than what it has done within the bull market. They tend to last about two weeks before descending unexpectedly.²

Bull markets tend to go strong for about two years. Many profits can be made at the beginning. This is the best time to be in the market and the fundamentals are generally very good as well.³ The PE is lowest at this time which means that the prices are low yet the earnings forecasts are optimistic. Buying undervalued stocks is great for growth investors as well as long term value investors. After about two years prices tend to have recovered and the market usually struggles more at this time.

Market Bottom:
Determining a bottom is easier, stocks and the market itself fall faster than they rise due to investors pulling back and some panic. There is greater volatility during bear markets, which can work to the investor's advantage. When the market has reached a bottom after a normal 10% correction, that can generally happens at least once a year or so, the volume picks up. The stock refuses to descend much further and the direction changes quickly. These are wonderful moments to make purchases. "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."⁴

In a bigger decline of 15% or more, the stock or market may begin to recover to a certain point but as it hits resistance it will make a big descend. Be careful not to be too eager to get in and purchase quite yet. Wait until you see a great deal of volume and no more descending. A spike in volume often happens after the stock has begun to make a recovery and is a few days off the bottom. This is a great signal that the bear market is over and bull season has begun once again. William O'Neil suggests that a true rally usually begins on the 4th through the 7th day from the bottom and the market indexes will be up at least 1.7% from the previous day. ⁵

It should be noted here that O'Neil's strategy is a great system for timing trades, but is by no means the only way. During the bear market of 2008, the S&P 500 correction was more than 30% and many investors who had aggressive holdings lost nearly 50% or more of their retirements and 401(k)s in stocks. The news reports were terrible and in the midst of the catastrophy it was reported (for all to know that successful investor and billionaire Warren Buffett was loading up in Coca Cola stock. Perhaps it was just a patriotic gesture of goodwill similar to when J.P. Morgan saved the day back in 1901. Perhaps it was just good business. What struck my attention was that he didn't buy at the bottom but loaded up on the way down.

Utilizing Fundamentals:
Fundamentals which are the statistics of a company's profits, loss ratios, equity ratios, and debt ratios, have a very important role in making investment decisions. These formulas go hand in hand with technical analysis which is the study of graphs and the indicators associated with them. If the fundamentals are good the graph should reflect that, and most often it does. If fundamentals are bad (negative numbers etc, diminishing earnings) there may be short term price growth but watch out! Over time regardless of what happens in the news the market tends to equalize equities to about what they are thought to be worth. And in the process they often overcorrect. Investors follow the herd right over the cliff. Successful investor Robert Kiyosaki puts it this way: "in the market, it is usually the crowd that shows up late that is slaughtered. If a great deal is on the front page, it's too late in most instances. Look for a new deal. As we used to say as surfers: there is always another wave. People who hurry and catch a wave late usually are the ones that wipe out."⁶

Successful investors have to be brave enough to go against the crowd, to see undervalued investments and be clever enough to acquire them when others are fearful and selling. This is where many of the profits can to be made.