So What is the Stock Market Going to Do?

So what is the stock market going to do?

So what is the stock market going to do now`? Continue downwards or start to recover and go upwards again'? Its anybodies guess as to what is going to happen.

But there are a few clues which can tell us when and if it's the right time to renter the market or not.
Firstly we can take a look at past history. We have had quite a few previous downturns, (call them corrections if you prefer.) Only to see the market to rebound and hit even higher levels than before.

Is there any guarantee that this will happen again? Given the laws of probability history says it will. But perhaps the higher the rise the bigger the fall next time.

Emotions play a vital part in the behaviour of the market. Fear and Greed are always the most predominant emotions at any given point in time.

At this particular time Fear is running rampant through the market with all eyes on the USA worrying about the possibility of a recession. While here in Australia the economy is doing the exact opposite with interest rates probably due to rise soon to slow the economy down. But no one is taking any notice of that at all.

Remember Fear invariably causes the market to go down while Greed has the opposite effect which can cause the market to rise.

Timing in the market is important particularly if you want to reinvest in the market after bailing out. But be aware that no one can pick the exact bottom or top of the market and if they happen to do so it is just pure luck and nothing else.

It never ceases to amaze me how quickly investors can forget the painful lessons learnt the minute the stock market begins to rise again and caution goes out the window. Fear takes a back seat once Greed gets hold of the steering wheel.

So what is the first thing to look for prior to re entering the stock market? Quite simply when prices stop going downwards, they start to begin to see saw up and down slightly and then begin to rise. There are no hard and fast rules which apply to this situation.

I personally use a system which comprises of three things.

Firstly I use a trading plan which I stick to religiously. (See previous articles on this.)

The second thing I look for are peaks higher and troughs higher. I shall explain this further.
The first is that the peak you see now is higher than the preceding one and also that one is higher than the one before that. In other words three high peaks in a row.

Each one higher than the one previous.

The same rule applies to troughs. Each trough is actually higher than the previous one. Again I look for three in a row. By seeing three of each in a row this confirms that the stock is in an upwards trend.

Of course sometimes there are no troughs at all, with the share price just going straight upwards. But be wary these "Shooting Stars" can reverse just as quickly as profit takers move in.

Secondly I use the law of probability.

When a share price is heading downwards there is a 70% chance of continuing downwards, 20% of going sideways and a 10% chance of it going upwards.

When a stock is tracking sideways I use 50% chance of staying the same a 25% chance of going downwards and a 25% of the stock going upwards.

For a stock in an upward trend I use the percentages of 70% continuing upwards, 15% chance of going sideways and 15% chance of the stock going downwards.

These percentages are what I use, but of course they are adaptable to suit yourself.

There is no right or wrong time to enter the stock market. The systems I use just put the odds in my favour a little. But the one thing that I always do is to "Buy in gloom and sell in Boom."

It works for me.