Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis

CHAPTER 7

The Broad Market

In addition to analyzing the charts of the stocks you trade, it is ­important to be aware of the trends of the broad market. Traders usually see improvement in their results when they implement monitoring of the market's movements into their routines.

One of the great things about being a technical trader is that you don't have to be an expert on all the things that may impact the market. The market is a discounting mechanism. It is continually pricing in all known information, such as economic conditions, government legislation, severe weather conditions, energy crises, and so on—everything that may affect the balance of supply and demand.

The market is always looking ahead. For instance, let's say something is anticipated to occur up to several months down the line (e.g., a specific piece of legislation). Market participants anticipate the future impact and begin pricing it in immediately rather than waiting until later when the event actually occurs. You may have heard the phrase “Buy the rumor, sell the news.” The market also prices in seasonal events, such as anticipated holiday retail sales.

The market quickly prices in new information. For example, in May and June 2013, when the Federal Reserve commented about potentially decreasing (­tapering) the $85 billion-a-month bond-buying program, the market responded by selling off. After years of very accommodative monetary policy, the market was not thrilled at the prospect of having the punch bowl ...