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Stock Market Indicators

by Daisy McCarty

Overview

Stock Market Indicators

Investors use a variety of stock market indicators to research investments. Trading patterns, technical measurements and financial information are used to monitor continuing trends and significant changes. Stock traders and brokerage firms consult a combination of these indicators to determine buy and sell points for either individual stocks or entire sectors of the stock market.
P&F Charts

Point and figure charts (P&F charts) streamline the process of identifying reversal patterns and confirmation signals for prevailing pricing trends. "X" and "O" markers identify the current short-term trend, while red and blue trend lines indicate moderate to long-term trends and also represent major support or resistance levels. These charts indicate how other investors perceive the value of the stock, and this perception can drive the short-term pricing up or down. Note: A high trade volume is necessary to perform a statistically meaningful analysis using a P&F chart.

Support and Resistance

Support and resistance levels are created when a large block of buyers or sellers trade at a particular target price. This activity makes trading beyond that price point much more difficult. The price usually moves rapidly up or down to test these levels. If support at the low end of the price range passes the test, the trend reverses to test the higher resistance level. If it fails, then the next support level is usually tested or a new, lower support level is created. A high trade volume makes it more likely that these barriers will break. Once this happens, support turns into resistance and vice versa. Usually, these new levels are immediately retested. This tends to be true with broader markets as well as for individual stocks.

Trading Volume
Candlestick Charts

Candlestick charts provide bullish and bearish patterns that give clues to overall investor sentiment. Trading on such cues is generally a successful tactic--especially for day trades. White candles (bullish) are created when the close at the end of the day is higher than that morning's opening price. Black or dark candles (bearish) are created when the close is lower than the opening price. A short black candle followed by a long white candle that extends beyond both the top and bottom of the black one is called a bullish engulfing pattern. This indicates that future short-term trading will be bullish.

Bullish Engulfing Pattern
Crossover and Divergence

Many technical indicators work on the theory of crossover or divergence. For example, a 50-day moving average rising above the 200-day moving average can be a strong confirmation of a long-term trend reversal when other signals also indicate strength. A 50-day average moving away from the 200-day average indicates continued long-term strength or weakness, depending on the direction of the divergence. The relative strength index (RSI) can help identify overbought or oversold conditions. A general trend is confirmed when the RSI index crosses over the 50 percent line in the middle of the chart. These signals can be used in combination with trade volumes to indicate stock strength.

Stock Movement
News

The primary drivers for a stock's price are market conditions and news about the company that might affect future earnings or revenues. Speculation regarding the significance of a particular piece of news (or rumor) is common. This creates volatility in price, which can create short-term opportunities for investors who interpret the information accurately.