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Stock Market Trend Analysis

Stock market trend analysis identifies whether to be long or short. Trading with the stock market trend is the best way to generate profits and beat the market. At least 60% of the gain or loss in a stock price is due to the stock market trend. This is why stock market trend analysis is so important.

Fortunately, the stock market moves in cycles. There are long term trends called secular markets that typically can last between 10 to 20 years. Shorter term or cyclical markets usually last between 2 - 3 years on average. The cyclical market is simply a shorter term cycle within the primary long term secular stock market trend. Then, we have even shorter trends that can last several months, several weeks, days, hours and even minutes.

The stock market trend analysis is the second stop in how to beat the stock market the Trading Online Markets way.

  1. The Business Cycle Phases
  2. Stock Market Trend Analysis
  3. Stock Selection Guide
  4. Disciplined Investing
  5. Stock Portfolio Management

Stock Market Trends

Since 1900 we have had 27 bull markets with corresponding bear markets to make things interesting.

As investors and traders, we need to analyze where we are within these stock market trends, so we can be on the right side of the cycle to enhance our success. For example, the market was in a secular bull market from 1982 - 2000, experiencing a strong primary uptrend where the S&P 500 increased over 15 fold from about 100 to 1,553. Of course, there were short term bear markets such as in 1987, however the easy money was made on the long side as the primary trend was up.

The problem is that the secular bull market that began in 1982 ended in 2000. While the stock brokers' advice to hold for the long term was good advice for a secular bull market, it was the wrong strategy for a new secular bear market. As history shows, this new secular bear market will probably last at least until 2010 or longer. The market rally from early 2003 until now is simply a cyclical bull market within the new long term secular bear market.

Here is an example of why it is important to follow the trend and not just buy and hold. On January 2, 2022 you had purchased shares of  all of the companies in the S&P 500.  On that day the S&P 500 closed at 975.00. On January 2, 2009, the S&P 500 closed at 931.80. If you had held your shares, you would have lost money, not counting the affect of dividends.

During that time the S&P 500 rose to a high of 1,552.87 on March 24, 2000, fell to a low of 768.63 on October 10, 2021 and back to a high of 1,576.09 on October 11, 2007. No one can claim to identify the exact highs and lows of the market. If you had captured 70% of the move up and down, you would significantly out perform most every investor.

To learn more about stock market trends please see my History of Stock Market Cycles page that describes the major trends the stock market has experienced over the last 100 years. I also encourage you to read two excellent books on this subject: Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis and Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.

Stock Market Trend Charts

There are several indicators that are useful to identify and display on a chart showing the stock market trends. To identify the trends, I find it best to start with the big picture and then work down to the daily view of the market.

To help understand the current big picture of the market, let's look at the monthly chart of the stock market trends of the S&P 500. What you see below is how the S&P 500 performed starting in 1988 through March 2009. A secular bull market began in 1982 ended in 2000. Then the market turned down experiencing a cyclical bear market that lasted until July 2003. Cyclical bear markets typically last two to three years, as did this one.

On this chart of the stock market trend, the 24 month moving average and three indicators provided the signals that the market was turning from an up trending bull market to a down trending bear market.

The 24-month Exponential Moving Average (EMA) acts as support during bull markets and resistance during bear markets. When the S&P 500 fell through the 24-month EMA, the market transitioned from a bull to a bear market. However, it is important to have confirmation of several indicators before drawing any final conclusions regarding a change in the trend of the stock market.

The 14 month Relative Strength Index (RSI) acts as good way to identify changes in the trend of the stock market. When the RSI is above 50, we are in a bull market and when it is below 50 we are in a bear market. At the end of 2000, the RSI fell below 50 indicating the trend of the S&P 500 was turning down. In July 2003, the RSI turned up through 50, indicating the new trend of the S&P 500 was up. Finally, the RSI turned down through 50 in December 2007, indicating another bear market trend was underway.

The Moving Average Convergence Divergence (MACD) also provides a good signal when the stock market trend is transitioning from a bull market to a bear market and back to a bull market. When the monthly MACD falls through its nine-month moving average, it is another sign the market is starting a down trend. Then watch for the MACD to turn up through the nine-month moving average to give a signal that the market is starting to trend up.

The Slow Stochastic Stochastic Oscillator adjusted for 60 month periods provides another good indicator that the stock market is transitioning from a bull to a bear market. When the Slow Stochastic falls through 80, it is a sign the stock market trend is changing from a bull market to a bear market. Should the Slow Stochastic rise through 20, it is a sign the trend in the stock market is turning up, signaling a new bull market.

When looking at the monthly chart of the stock market trends, it is best to see all three indicators (RSI, MACD, and Slow Stochastic) and the 24 month EMA giving the same signal before making a final decision that the trend in the stock market has changed. Using all the indicators and the 24 month EMA helps to avoid receiving false signals. For example, in 1998 the MACD gave a signal a new bear market was beginning. However, the RSI did not. This turns out to be correct and anyone who believe the market was in a new bear market in September 1998 was left out of the continuation of the secular bull market that continued for three more years.

s&p 500 monthly stock market trend chart

The next step in evaluating stock market trends is to drill down and look at the weekly chart of the market. Let's continue with the S&P 500 as shown below. The vertical blue lines represent the same bear market that began in 2001, as depicted above in the monthly chart. In this chart notice how the 65 week Exponential Moving Average acts as support during cyclical bull markets and as resistance during cyclical bear markets. The 23 week RSI also acts as a good indicator of when we are in a cyclical bull market or cyclical bear market. Again, it is good to have confirmation of several indicators before drawing any conclusions. The green arrows are areas where support was tested and held. These represent good buying points for the market as a whole. The red arrows represent areas where resistance was tested and held.

Weekly S&P 500 stoch market trend chart

Drilling down further, we examine the daily S&P 500 chart of the stock market trend. As you might expect there are new trends that can be identified at each level of our drill down. Continuing with a one year chart of the S&P 500 below, there were several signs that the market was getting weak.

First, in September 2000 the S&P 500 could not rise above the prior high reached in March 2000. The index then fell down through a rising trend line that had been in place since March. This pattern of a rising trend line and a horizontal resistance at the highs formed an ascending triangle, a bullish formation. However, when there is a failure of an ascending triangle, it is another sign of further weakness. Next, the 50 day moving average fell below the 200 day moving averages, another sign of a potential bear market forming. Then the MACD was unable to rise as high on the S&P 500's attempt to break to a new high. Finally the Slow Stochastic was unable to rise to the 80 level, which was another sign of weakness.

On their own, each of these signs in the chart of the daily stock market trend do not mean the S&P 500 is turning down. However, when you find a number of indicators giving you the same story, then it is time to pay attention. In this case, there were signs the trend in the stock market was changing. While they do not necessarily mean a bear market has begin, the chart indicators were very good warning signs that the stock market trend was changing.

Investors can use charts to assess the stock market trends to establish whether you should be long or short in the market. Each investor should create their own rules of when to be long and when to be short. For me, I adjust my portfolio to fit the current trend, shifting money to securities that will outperform the market as the trend changes. In particular, it is important to pay attention to the big picture view of the stock market trend as depicted by the monthly charts.

Once you have decided what trend to follow, you should start the stock selection process. Next, comes the search for the best companies that meet our fundamental criteria. Please read Part 3 of Beat the Market, Stock Selection.