When you people talk about trading stock market trends, you will often times hear how they approach the market with a top down approach to select what stocks to trade. This allows the stock trader to go with the market, rather than against it. What exactly is a top down approach and how can it help me with recognizing and profiting from stock market trends effectively? 

When you use a top down approach, you are using a strategy that starts with the big picture and dials down to the inner elements, as you look for more information that assists you in making your trading decisions. To start out, you want to look at the major indexes. These include the NASDAQ 100, Russell 2000 and S&P 500. You can use the Dow Jones Industrial Average if you want to, but I’d rather use it for my next step.

Use the main three indexes to locate the current stock market trends in each. Are they moving in sync? Which direction are they moving? Who’s leading? Who’s lagging? These are all important questions to ask, and will need to be answered in order for you to identify the stock market trends that are present. If the small caps (Russell 2000) are leading, there is more speculation in the market, and that needs to be addressed. If the S&P 500 is leading, it can be a sign that the fund managers are looking to keep pace. If you learn the clues that the market leaves, you will have an effective understanding of the stock market trends.

Next, I take a look at the Dow Jones Industrials, Transports and Utilities. Dow Theory has been used for over a century to help identify turning points in stock market trends, and I like to see if these three brothers (or sisters) are in providing any clues.

I then go down to the sectors. I want to look at individual sectors for the most part. I want to see how Semiconductors, Biotechs, Drugs, Healthcare, Internets, Software, insurance, Banks, Brokers and the Cyclicals are acting. I take notes and look at which ones are acting stronger and weaker then the others, which give me a great idea of which side of the stock market trends I want to be on.

Finally, after I highlight which sectors are strong and weak, I take a look under the hood, and look at the individual stocks that make up the sectors. After identifying the directional opinion on the top stocks in the sectors, I highlight key support and resistance levels and use them for trading opportunities. I compile a hit list that journals the stock
name, the directional opinion I have formulated, and if I can target in, the entry and stop loss. I then use this list as my day to day work sheet and look to see if any of the analysis that I have come up with plays out.

While the above steps are just about the simplest way of identifying stock market trends there is, but don’t discard the effectiveness. Follow these steps and you will have a topdown approach for taking advantage of the stock market trends.
6/23/2012 05:13:07 am

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