Reading the Stock Market

The direction of the overall market influences the behavior of individual securities. Study the overall market first before looking at any stocks in isolation.

The Global Market

US stock markets represent almost half of the combined value of all global markets and significantly influence other markets. Always keep a weather eye on the direction of the 3 averages: the Dow Jones Industrial Average, Standard & Poor 500 and the Nasdaq.

Stay on the alert for events which could have a significant effect on the global (or US) economy. The usual suspects are:

The chart below shows 3 major indices over a 5 year period. Their growth rates may vary but all move in sympathy with each other.

Stock Market Comparison

Market Risk

The market is the major influence on the performance of an individual security. In Point & Figure Charting Thomas Dorsey compares the impact of the market to other influences on the price of an individual stock:

Market risk 66%
Sector risk 24%
Stock risk 10%

Actual figures may vary substantially but the largest influence for most stocks will be market risk.

Market Direction

Chart patterns are often used to identify major market changes:

Several market direction systems also deserve mention:

Colin Twiggs

Author: Colin Twiggs is a former investment banker with over 30 years experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary newsletter.

Colin also writes The Patient Investor newsletter which focuses on the global economic outlook and key macro trends.

In addition, he founded PVT Capital (AFSL No. 546090) which offers investment strategy and advice to wholesale clients.