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Stock Market Trends: Analyze & Identify It Correctly

Stock market trends

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Around 2.31- 8.31 billion shares are traded each day in the US markets.

And for every single transaction made in the market each day has its results in the price movements which in turn change the Stock market trends.

well, you can never predict in absolute terms, how these collections of transactions will work because this transaction represents a collection of individuals, speculators, investors, hedge funds, mutual funds, etc. Each with a different view and objective of the markets.

But there is an “Order in this chaos” and it’s your job to find it. Because Fortune changes with every tick of price and this article will help you understand the order in chaos.

Sensing Stock Market Trends

They said “Trends are Friends’.

If you are trying to interpret trend analysis why not use the classic “Dow Theory” which was developed by Charles Dow, who was Co-founder and editor of the wall street journal until his death in 1902 and was also the co-founder of Dow Jones & company. The Dow Theory is a  market-timing tool that has been relevant on Wall Street for over a century now. This is still very relevant for any financial market, any country or at any given point of time.

Now, Trends are really important for the traders and Trends can make or break the life of any trader.

Similarly, the understanding of Long term trends is also an important component for any Long term investor’s success.

If trends are not with you then it will be in very difficult positions.

But wait, what is a Trend actually is?

Simply put trends are “Movement of price averages

You may have heard simple moving average or  Weighted moving average well let’s not dig into that now.

According to Dow theory

The Market Has Three Trends

All of which may be in progress at one and the same time. or in other words, All three trends are active all the time and maybe moving in opposite directions.

Primary Trend

When people say we are in the Bull-market(long uptrend) or in the Bear-market (long Downtrend) they are basically indicating the broad upward or downward trends also know as Primary stock market trends. These trends may last several years. Primary trends are often interrupted by secondary and minor trends.

These long term market trends are most easy to understand, classify and Identify.


Secondary Trends

These are the most deceptive trend or reactions these are an important decline in bull markets or rally in a primary bear trend.

These reactions usually remain for a few weeks or months

These trends are super important for speculators and swing of momentum traders.

And if a long term investor is willing to work a bit more. He or she can optimize the portfolio returns by going Long or shots in parts as these trends present themselves.

Young Warren Buffet with small capital was used to do the same with his Graham-dodd style value investing enabling him to ride the full secondary trends often.



Minor/Tertiary Trends

These are daily fluctuations and mainly are concerns of the day traders who attempt to make money on a daily basis.

As time goes by these trends may become the secondary reaction when continued for at least a week or so.

When trying to figure out the stock market trends, you should train your eyes to look for all the three trends.

 No real stock market trends without volumes

One important factor and where most of the people make mistakes is that “These Trends must be confirmed with Volumes”. 

if there’s an uptrend then that should be confirmed with more buying volumes and downtrend should be confirmed with more sell volumes.

Phases of Trends

phases of stock markets trendsTo increase your understanding further. You must know that each trend has three distinct phases of the “Trends”.

In the typical Bull market for example

After steep corrections, when usually markets feel hopeless and fear grips the market “Smart money”, institutional investors and value investors who invest for very long term get in and start accumulations slowly at dirt cheap prices without spooking prices too much. this is an accumulation phase. Like for a mutual fund, it’s not easy to move in and out quickly without affecting the prices much. it can take up to 3-4 weeks for a mutual fund to take any position.

Once prices start to move up a bit short term trader & jump in & usually coincides with improved market sentiments tend to take the stock price higher hence the beginning of the “markup phase”

As more and more public participation and trading increase, trend reaches a phase called “Distribution Phase” where now long term investors usually start offloading their position slowly and it usually followed by panic and cycle starts again.

Similarly, in a primary bear trend, It starts with the distribution phase, then public participation or markdown phase, and ends with panic (or despair) phase.

These cycles are always present in Secondary and minor trends as well.


Limitations of Dow theory

1. Markets are Always Efficient

Dow theory is based on Efficient market theory, which means all information – past, current and even future are reflected in current market prices are already discounted which includes earnings potential, competitive advantage aka “The Moats”, management competence as it completely ignores the behavioral & value aspect of markets.

Which in turn means You Cannot beat the market returns.

And that’s simply NOT TRUE(emphasis added).

Here warren buffet think about Efficient market theory

“I’m convinced that there are many inefficiencies in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.”

2. It’s just a monitor

Dow theory reads Markets like a Heart monitor, It won’t tell you the cause of changes but may lead to the symptoms that lead to change.

These methods can only give you a general idea of trends only.

These are not an infallible system for beating the market.

Any financial market is just a collection of individual human beings and bots. Human beings are fallible.


Analyzing stock market trends are a critical factor for success.

An investor with a very long term view tries to capture primary trends and is not concerned with secondary & minor trends. But can optimize the returns by taking secondary trends into consideration.

Short/medium term investors and speculators can ride the secondary trends they can optimize their returns with minor trends.

As with anything in life more you train your eyes to look at the markets better you will get with time. Better you will be able to play the markets

There are technical indicators available to judge how strong or weak a trend is.

And combining your value investing with stock market trends is a very intelligent way of investing.

What is trend analysis in stock market?

There are always three trends present in the stock market i.e Primary is a Long up or down trend, secondary is reactions in primary trends and the minor trend is a daily fluctuation

what is trend analysis?

The practice of collecting & plotting data to identify data which often used to predict the future with a certain probability

how to do trend analysis?

This can be easily done by the method of dow theory, which is a classical & still relevant way to do the trend analysis


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