Stock markets tend to move from low levels up to higher levels and vice versa, while investors always attempt to make money on the way up, or on the way down.
The widely acceptable way for profiting in the stock market is on the way up, as this is when everybody really makes money and the economy of the underlying country is expanding. There is a third possibility where investors can actually profit when markets remain unchanged, this is made possible through the use of sophisticated financial instruments known as Options, or in the case of stocks, Stock Options.
Stock markets always follow the path of maximum confusion.
That is, stocks themselves hardly ever move as anticipated by the public, but rather they tend to follow good forecasts so as to move from level A to level B, but they do so in the most confusing way possible. Most of the time investors cannot make sense of the available market news, and most trading action can seem as nonsensical. As a result of all this confusion, stocks often rally when there is seemingly bad news, and they decline when there is seemingly good news. But it is the news itself that’s the problem. News may already have been priced in by the markets, or it may be a different more complicated scenario where it’s no longer a simple matter of bad or good news. Economic news in particular can impact markets in complicated ways, for example a single economic report may cause markets to drop in the near term, and at the same time to be considered as a positive factor in the longer term, looking 5-6 months in the future. And there is also uncertainty, stocks tend to rally even when there is bad news, but news that has helped removed uncertainty.
Market turning points are primarily determined by points of high or low demand, known as swing points that have been breached by market price at some point. This is the first and foremost factor for determining whether a market is in an up trend or in a down trend.
The SP500 index, its trend changes to up every time price breaches a previous swing high (green arrows), and equally it changes to down every time price breaches a previous swing low (red arrows). The definition of swing highs and lows is rather complicated, but one can see on the above chart that not all apparent swing points qualify, as being actual swing points. Sometimes the distinction between a valid and a false swing point is almost impossible to make, even among experienced traders.
The Media Factor
There is also the media factor and the broader public opinion, these tend to be wrong most of the time, if not always. The media tend to explain away each and every move markets make on a daily basis, by citing cherry-picked convenient matching stories. They for example blame falling stock markets on some unrelated events which is seen as negative and so on. The public also tends to be wrong, though sometimes it can be right. Sometimes the majority of investors can be right and markets go as expected, but the media are always always wrong, and sometimes have no explanation at all for the daily moves in the markets because there are no convenient matching stories to use on such days.
The media are always wrong, and the economists who are invited to talk on the financial TV channels are simply offering conflicting opinions. Even among ten different economists and market analysts one will find ten different opinions about the markets. Likely five of those will argue that the market will go down, the other five will argue that it will go up, and even among the five arguing that the market will go up, will be citing different reasons each, and all five will favour different stock sectors. So it is important to understand that it is the difference of opinion that makes stock markets work, there has never been total agreement on anything and never will be.
There are no overbought or oversold levels in the stock markets, stocks can go even lower no matter how low they might be. Equally they might keep on rising and rising to ridiculous levels, that are no longer relevant to the balance sheets of their companies. The idea of using balance sheet analysis methods to predict where a stock can go is wrong, and sometimes very wrong. It can only work in the long term and that is for assessing the resilience of a stock, but not current stock price direction.
Finally there are some stocks, especially stocks of companies specializing in brand new technologies which are completely unpredictable to economists. This is because economists tend to use balance sheet analysis methods and simple economics, which is okay for classic businesses and companies, but not for inventive companies. A new radical product for example can help a small company achieve phenomenal growth, and massive profits, and only those who understand industry analysis and the impact of that new technology can make predictions. Economists are stuck to balance sheet analysis, past sales figures, operating costs and so on, and are totally oblivious to the potential of new inventions that might change the world.
