M = Market Direction: How to determine it? 1.

The best way to determine the direction of the market is to follow and understand every day what the general market averages are doing. 2. Dow Jones Industrial Average and S & P 500 should be followed and. 3. The most comprehensive average is the Investor's Business Daily 6000 market valueweighted index, which covers all New York Stock Exchange, American Stock Exchange, and NASDAQ. 4. The difficult to recognize but meaningful market average changes are important indicators to judge the direction of the market. 5. Study the general market chart every day. 6. Learn to interpret a daily price and volume chart of the general market averages. If you do, you can't get too far off the track. You really won't need much else unless you want to argue with the trend of the market. 7. How can you identify stock market tops? When market indexes peak and begin major reversals, individual investors should take action immediately and raise 25% or more cash by selling stocks at the market prices (use of price limits on orders is not generally recommended). 8. One technique that Fisher calls the "sushi roll" has nothing to do with food, except that it was conceived over lunch where a number of traders were discussing market set-ups. He defines it as a period of 10 bars where the first five (inside bars) are confined within a narrow range of highs and lows and the second five (outside bars) engulf the first with both a higher high and lower low. (The pattern is similar to a bearish or bullish engulfing pattern except that instead of a pattern of two single bars, it is composed of multiple bars.) In his example, Fisher uses 10-minute bars. When the sushi roll pattern shows up in a downtrend, it warns of a possible trend reversal, showing that it's a good time to look to buy or at the very least, exit a short position. If it occurs during an uptrend, the trader gets ready to sell. While Fisher discusses five-bar patterns, the number or duration of bars is not set in stone. The trick is to identify a pattern consisting of the number of both inside and outside bars that are the best fit with the chosen stock or commodity using a time frame that matches the overall desired time in the trade. The second trend reversal pattern that Fisher recommends is for the longer-term trader and is called the outside reversal week. Basically, it is a sushi roll except that it uses daily data starting on a Monday and ending on a Friday. It takes a total of 10 days and occurs when a five-day trading inside week is immediately followed by an outside or engulfing week with a higher high and lower low. In Figure 1, each 10-bar part of the pattern is outlined by a blue rectangle. Note the magenta trend lines showing the dominant trend. The pattern often acts as a good confirmation that the trend has changed and will be

followed shortly after by a trend line break. As you can see, the first 10-bar rectangle fits inside the upper and lower boundaries of the second. Also note the horizontal line on the right side of the chart showing the low of the outside rectangle, which is a good place for

a stop loss. 9. After the top, poor market rallies and rally failures in the averages will occur. Further selling is advisable when these weak rallies or rally failures are recognized. 10. Recognizing when the market has hit a top or bottomed out is 50% of the whole complicated ball game. It is also the key investing skill that all-too-many professional and amateur investors seem to lack. 11. Market tops weather intermediate (usually 8-10% decline) or primary bull market peaks, occasionally occur 6-7 months after the last major buy out point in leading stocks and in the averages. 12. To help anticipate possible market peaks, you should also determine when long-term capital gains selling will begin by those who bought stock in increased volume at original break-out buy points on individual stock graphs. 13. What signs you should look for to detect market tops. Watch for Heavy Volume without Further Price Progress Up. 14. On one of the days in the uptrend, the total volume for the market will increase over the preceding day's high volume, but the Dow's closing average will show stalling action, or substantially less upward movement, than on the prior few days. 15. The spread of the market index will be larger and the market average might close down for the day which is a sign that one must liquidate. 16. The second and last chance for recognizing a top reversal is when the market attempts its first rally after a number of days down from its highest point. 17. Three ways the first rally attempt can fail.* 18. Be prepared for abrupt rally failures. Very often the first stock market rally during a beginning downtrend will fail abruptly. After the first days resurgence the second day

will open strongly. But towards the end of the day the market will close giving out a sign of liquidation. 19. The initial market decline can be on a lower volume. * 20. The Hourly Market Index and Volume Changes Give Hints Near Turning Points. * 21. Look for divergence of key averages at major turns. 22. A 33% drop requires a 50% gain to break even. 23. FRB Discount rate changes are influential. 24. During a bear market the stocks open strongly in the morning but close weakly at the end of the day. 25. Bull markets open weak but close strongly. 26. Do not enter into stop loss orders. 27. When laggards show increase in price its a sign of an upcoming downtrend. 28. Price resistance by some major stocks during a downtrend is a definite signal for an upcoming bear market. 29. Advance Decline Line. A technical indicator that plots changes in the value of the advance-decline index over a certain time period. Each point on the chart is calculated by taking the difference between the number of advancing/declining issues and adding the result to the previous period's value, as shown by the following formula: A/D Line = (# of Advancing Stocks - # of Declining Stocks) + Previous Period's A/D Line Value. This indicator is used by many traders to confirm the strength of a current trend and its likelihood of reversing. If the markets are up but the A/D line is sloping downwards, it's usually a sign that the markets are losing their breadth and may be setting up to head in the other direction. If the slope of the A/D line is up and the market is trending upward then the market is said to be healthy. Exchange stocks advancing each day versus the number declining. However, this measure is imprecise because the advance-decline line sometimes may veer down substantially before the actual top in a bull market. In other words, a market keeps advancing toward higher ground but is being led by fewer stocks. There is one way an advance-decline can be an effective aid. During a bear market you will have several rallies. It is of value to know how the advancedecline line rallies during these intermediate recovery movements. 30. The January 1985 rally. On the positive side, the powerful resumption of the bull market in the second week of January 1985 was clearly and easily forecast by the advancedecline line three weeks earlier. The NYSE advance-decline line broke above immediately prior peaks three times while the Investor's Business Daily stock index moved sideways and the Dow Jones Industrials actually took a nosedive. 31. Follow the market leaders for clues. After an advance in stocks for a couple of years or more, if the majority of the original price leaders top, you can be fairly sure the overall market is going to get into trouble. 32. Indicators to recognize tops in stock leaders. Many of these securities will break out of their third or fourth price base formation on the way up. Most of these base structures

will appear wider and looser in their price fluctuations and volatility and have definite faulty characteristics in their price patterns. A faulty base can best be recognized and analyzed by studying charts of a stock's daily or weekly price and volume history. Some stocks will have climax tops with rapid price run ups for two or three consecutive weeks. A few will have their first abnormal price break off the top and display an inability to rally more than a trivial amount from the lows of their correction. Still others will show a serious loss of upward momentum in their most recent quarterly earnings reports. 33. Spotting stock market bottoms. Again, the daily general market averages provide the best clues. Watch for the first time an attempted short-term rally follows through on anywhere from its third to tenth day of recovery. The first and second days of an attempted improvement can't tell you if die market has really turned, so I ignore them and concentrate on die follow-through days of the rally. The type of action to be looked for after the first few days of revival is an increase hi total market volume from die day before, with substantial net price progress for die day up 1% or more on the Dow Jones or S&P Index. There will be some scarce cases where whipsaws may occur; however, in almost every situation where the rally has a valid follow-through and then abruptly fails, the market will very quickly come crashing down on furious volume, normally the next day. 34. Wait for second confirmation at the market bottoms. The bottom day in the Dow Jones or the first strong day up after a major decline is usually the first indication of a possible bottom. A good follow-through, with the Dow Jones up 18 or 20 points or more (if the Dow is in the 1800 area) and accompanied by an increase in daily volume from the day before, will usually be on the fourth, fifth, sixth, or seventh day of the attempted rally. This is your second confirmation and main buy signal. Follow-throughs after the tenth day indicate weakness. 35. The Dow Theory. You must analyze the industrial and rail averages together. If the industrial average after a prolonged bear market breaks out of its original formation you must wait for the rail averages to do the same as well. This theory was useful before but now they have also included airlines in the equation as well. 36. When advisory letters start to become bullish or bearish market has already reached the market top or bottom respectively.