How to Identify Stock Market Trends

Trends… Find them, ride them and get off.

How to Identify Stock Market Trends
Photo by 愚木混株 cdd20 / Unsplash

Identifying stock market trends is like eating and drinking the Zeitgeist. It has to be inside you to understand it. You have to be social, go outside, go to parties, etc. If you're not "hip" then you'll never see emerging trends until they're already established. Then it's a matter of chasing their coattails and riding them for a bit.

Years ago Howie had a great tag-line for his blog, it was "Trends… Find them, ride them and get off." I thought that was a great way to frame the problem and represent one way to generate "alpha" for the short term. Get in on a trend before it takes off and then ride it up (or down). The next trick is getting out, as Howie so eloquently puts it, "ride them and get off."

This one is trickier because because it requires you to leave your computer screen and go out into society. You need to observe, read, mingle, and talk. I know that this can be tough for introverts - and a lot of good traders/investors I know are introverted - but you have to put on your social shield and go out.

Having kids is good too, or at least access to nieces and nephews. You can ask them what all the kids are buying or having bought for them. What are they playing, what's cool, etc. Right now it's Fortnite, Discord, and iPhones. This is how I learned about the Minecraft craze and ended up going long in Microsoft. Granted, Minecraft is now "so old" but it's still played by millions of people and Microsoft is doing well.

Note: I didn't just buy MSFT because my kid was playing Minecraft, I really like what their cloud strategy is for Machine Learning and Data Science. I think they're going to hurt Amazon and beat Google quite handily, but that's a topic for another post completely.

(c) Stockcharts

But that's technology. What about retail, fashion, and other consumer type goods? For that you have to "go shopping" or at least visit the mall. I rely on my wife for a lot of retail and fashion stuff. For consumer goods or building related things I usually visit a Lowes or Home Depot.

(c) Stockcharts

I also talk to my Engineering friends, now that I'm out of that field. If they tell me they're busy right now then I can expect a 6 to 9 month follow through in the economy. Right now, they're not so busy because the holidays are coming. What happens in January will really sets the tone for 2020.

Stock market trend following has been around ever since a market has existed. Tulips anyone? It's super easy to do if you access to a computer. All you do is load up your favorite stock, set the time period to daily or weekly, and it should become readily apparent which way the trend is going.

(c) Stockcharts

Note: You should read about how I stunk up the joint with TRTC.

Some traders and investors like to use moving averages, usually the 50 and 200 day/week moving averages to confirm that the stock is trending higher or lower. Since I like to be positive, I really like up trends relative to down trends, but both are very useful for things happening in the social sphere (see below).

There's 1,000's of stocks being traded everyday and some go up and while other's go down. For the most part we passive investors like it when stocks go up from where we bought them and the same goes for trend traders as well. The question is, how do you find these stocks in the first place? I listed some ideas above but what about looking at the market action itself?

For that you need to create a shortlist of stocks to analyze. My favorite ways to see if a stock is in a strong trend is to find a basket of stocks that are making 52 week highs, filter them based on my personal criteria, and then draw a trend line on the chart.

52 Week High Method

One very popular method for finding a short list of stocks in trends is to look at which stocks are continuously making new 52 week highs. It's even better if they're making NEW 52 week highs. From that 'short-list' you can find out what market sector those companies are in and then cross reference them to what's happening socially and culturally. This is perhaps the most popular method that I know of to find great stock market trends.

How do you find all time 52 week highs? I like to use, they have a great Screener that let's you search for New Highs. From that interface you can also filter out specific criteria for the stock list. I always look for very active stocks (volumes > 2x) that are making those new highs. You can manipulate the screener to your preferences.

Once you have a short list you can click on remaining stocks and see if there are any trendlines.

Trend Line Method

The trend line method is very simple. You just draw a straight line across all the closes and see if the line is positive (going from the lower left to the upper right area of the chart).

(c) Finviz

In the example above, FCEL has a positive trendline for it's closing prices, which means that over time the price is rising. It broke out higher under strong volume to make a new high. This would be a stock for me to watch and trend follow.

End Notes

While I like looking at stock market charts and seeing established trends, I feel that the smart money is made when you buy and buy-in low AHEAD OF TIME.

Of course you can get a clunker like TRTC (that's my loser from years ago), but with good risk management and a smart entry, you can really ride things up. Of course, you don't make any money until sell, and finding price point can be very hard. What are some good spots to sell? I'll share that in another post.

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