Introduction:
When trading stock market trends are constantly taken into account. Any seasoned stock investor will tell you that without understanding market patterns, traders or investors are lost. Trends inform you of the market’s current trend, whether upward, downward, or steady, as well as prospective future directions. Many investors research prior market trends that correspond to a country’s situation. For example, understanding previous market movements during similar periods of inflation or economic slump may aid in analyzing a stock’s return potential. By constantly analyzing the markets, you may be able to identify a certain sector to invest in.
It is critical to understand how any marketplace you trade in works. How will you trade if you don’t grasp how the market works? This crucial lesson marks the start of your investment experience. Only by learning share market analysis or equity market analysis will you be able to make wise decisions and, as a result, profit.
What Is a Trend?
The broad direction in which the stock is moving is referred to as a trend. Trends move upwards or downwards depending on whether the market is bullish or bearish. A movement must be of a certain length to be labeled a trend; nevertheless, the longer the trend travels (either upward or downward), the more notable the trend becomes. Rather than selling stocks as soon as they notice an upward trend for a short duration, investors benefit from holding stocks for a longer length of time.
Investors utilize market up and down movements to determine whether to purchase or sell shares. Investors may make decisions to hold onto equities that have performed well in the past based on previous similar trends and share market data. Market trends communicate information regarding patterns in specific stocks as well as different industries or sectors.
Types of Market Trends
-
Primary Trends
Bull and bear markets are also referred to as primary market trends; history has proven that these markets often last one to three years. It indicates the market’s overall direction. Depending on the movement, in the world of investment, we also refer to primary patterns as a bull market or a bear market. The major trend might move in either direction. If the primary trend moves downward, we refer to it as bearish, and if it moves upwards, we refer to it as bullish. This trend is only of interest to long-term investors or swing traders. As a gauge for the entire economy, the primary trend also reflects the success of the large companies listed on the stock exchange.
-
Bull Market Trend
Bull market conditions exist when the stock market is experiencing an extended upward trend. In other words, the market’s stock values are rising for an extended period of time. Additionally, a single stock or sector may be positive. This frequently promotes purchasing, and hence, asset prices continue to grow. Investors are enthusiastic about the market or economy, and stock market prices are rising as a whole.
Bull markets typically begin when stock prices rise 20% from their low and end when they fall 20%.
For example: From April 2003 to January 2008, the Bombay Stock Exchange’s index, BSE SENSEX, saw a huge bull market trend, increasing from 2,900 points to 21,000 points, a return of over 600 percent in five years.
-
Bear Market Trend
Bear market conditions are the exact reverse of bull market conditions. Bear market conditions exist when the stock market is experiencing an extended downward trend. In other words, the market’s cumulative stock values have been dropping for an extended period of time. Additionally, a particular stock or sector may be bearish. This frequently stimulates selling, and hence, asset prices continue to decline. The aggregate stock market declines due to investor pessimism, negative feelings, and market or economic anxiety.
For Example :
As a result of the COVID-19 pandemic, various stock market crashes triggered global bear markets at the beginning of 2020. Currently, fears of an inflation surge and probable increases in the Federal Reserve funds rate and RBI repo rate may trigger a bear market in 2022.
-
Secular Trends
A secular trend, which can span between one and three decades, contains numerous primary trends and is, for the most part, easy to discern due to its duration. For around twenty-five years, the price-action chart appears to be nothing more than a series of ascending or descending straight lines.
Long-term changes in the business environment or economy are known as secular trends. Secular trends represent the overall growth or decrease of an industry, or, in some cases, a group of linked industries, independent of business cycles. While secular declines cause once-dominant organizations to lose a lot of value or even go out of business, secular growth tendencies may also generate new, dominating companies.
Fundamental economic changes like changing consumer behavior, shifting demographics, or the emergence of new technologies are what propel secular trends. Investment (from individuals, businesses, and even government organizations) frequently flows into the industries benefiting from the secular trend when a new area of growth gains momentum, which fuels additional growth.
An economic cyclical trend is not a secular trend (like manufacturing activity, for example). Economic downturns, however, may temporarily halt the growth of stocks that are a part of a secular trend. The equities frequently quickly recover from losses and resume growth far sooner than stocks in other economic sectors.
For example, a secular trend that has existed for a few decades and is anticipated to remain for the foreseeable future is the development of computer technology. Another more recent trend that appears to have a long future is e-commerce.
All secular growth trends eventually come to an end, and in between, depending on the status of the economy, they may slow down or pick up speed. For instance, the COVID-19 epidemic hastened the long-term rise of cloud computing and e-commerce. Secular growth tendencies should be considered by investors who want to buy and hold reputable companies, and they can adjust their stock purchases accordingly.
-
Intermediate Trend
Intermediate trends consist of sudden rallies and directional reversals, which are typically the result of economic or political action and its following reaction.
Prices do not move in a straight line; rather, they move in a particular direction. The counter-cyclical trends that interrupt a primary trend are called intermediate trends. In a bullish trend, a decrease will constitute an intermediate downtrend, and in a bearish trend, an advance will constitute an intermediate uptrend. These trends often last between three weeks and several months. They are readily identifiable on the daily chart. Numerous participants accompany this trend; they may be arbitragers who gamble against the trend or traders who profit from trading in countertrend directions. Consequently, prices fluctuate in smaller swings while following a larger trend.
According to historical evidence, the rallies in bull markets are substantial, while the reactions are relatively weak. The other side of the coin reveals that bear market reactions are robust and rallies are brief. Each bull and bear market will have at least three intermediate cycles, according to hindsight. Each intermediate cycle could last anywhere between two and six to eight weeks.
-
Long-Term Trends
Any price movement that occurs over an extended period of time, typically one year or more. Long-term trends are difficult to anticipate and are sometimes broken by brief movements in the opposite direction.
Assumptions In Dow Theory For Identification of Market Trends
The Dow theory is a US financial theory that says the market is in an upward trend if one of its indices advances above a previous important high and is accompanied or followed by a similar advance in the other indices.
- The first assumption is that it is impossible to manipulate the fundamental trend. When significant sums of money from many regions of the globe are at stake, the temptation to manipulate is inevitable. Dow did not dispute the idea that speculators, specialists, or other market participants could manipulate prices. He modified his assertion by asserting that the primary trend could not be manipulated. Intraday, daily, and maybe even secondary price fluctuations are susceptible to manipulation. These small swings, ranging from a few hours to a few weeks, may be susceptible to manipulation by huge institutions, speculators, breaking news, or rumors, but it is hard to alter the primary trend. Long-term value investors rely on the primary trend because they recognize that it reflects the true performance of the companies behind the trend.
- The second assumption is that the market incorporates all accessible data. All the information is already represented in the markets through the pricing. Prices represent the sum of all participants’ aspirations, anxieties, and expectations. The market has already priced in interest rate fluctuations, earnings estimates, sales projections, presidential elections, product launches, and everything else. Unexpected events will occur, although they will often have only a short-term impact on the trend. The overall trend will not be affected. The Dow theory is based on the efficient market hypothesis (EMH), which asserts that asset prices reflect all available information. In other words, this strategy is antithetical to behavioral economics. Earnings potential, competitive advantage, and management skills are all priced into the market, despite the fact that not every individual is aware of these specifics. In stricter interpretations of this idea, even future events are dismissed as risks.
- The third assumption is that all indices must be consistent with one another. We cannot confirm a trend with a single index alone. CNX Nifty, CNX Nifty Midcap, CNX Nifty Smallcap, etc., must all move in the same upward direction for the market to be considered positive. It would not be possible to define markets as bullish based solely on the performance of the CNX Nifty. All the major, intermediate, and minor stock market indices must move in the same direction.
- The fourth assumption is that volume and pricing must both be confirmed. The volume should support the trend. In an uptrend, the volume must increase as the price increases and decrease as the price declines. In a downtrend, volume must rise as price falls and fall as price rises. A volume increase or drop demonstrates the authenticity of market optimism or pessimism. If prices grow or decrease with very low volume, it is evident that a specific group of investors is manipulating the market. In the realm of finance and investments, volume refers to the number of shares that are exchanged per day.
Four Factors That Shape Market Trends
The stock market doesn’t move in a linear pattern, as you will notice if you pay close attention. They fluctuate between being up and being down at random periods. Since many factors influence stock market movement and trends, it can be challenging to predict. Let us discover four factors influencing the stock market movement as you read on.
-
Government Policies
Trends in the stock market are directly impacted by the government’s policies. This is so because, in most cases, the policies directly affect the attitudes of investors and the economy as a whole. Stock markets rise if investors think the policies are good. On the other side, the market is negatively impacted if they are thought to reduce investor confidence. For example, the Reserve Bank of India’s reduction in repo rates is typically anticipated to support markets in the days to come.
-
Geo-Political And Geo-Economic Event
Geopolitical and geoeconomic developments have an impact on the stock market as well. For example, a situation in the neighboring nation may have an impact on the stock market since it may have an impact on trade and the economy as a whole.
Additionally, as many investors trade in equities with significant investments in multinational corporations, events in developed economies around the world, such as the US, can have an impact on the Indian stock market. Therefore, changes in the world can have a significant impact on stock market movement.
-
Speculation And Expectation
Investors’ and stakeholders’ speculations and expectations have a significant impact on stock market developments. Speculations drive the behavior of investors today, while expectations serve as the basis for their actions tomorrow. If guesses and expectations align with those of investors and other stakeholders, markets and trends respond positively. Alternatively, if it’s the contrary, the trends will reflect that, which is typically a decline in prices or indexes.
-
Internal or External Development Within a Reputed Company
Internal company developments also have the potential to influence market trends. Mergers and acquisitions, appointments, earnings releases, and other events might influence market movements. If the news pertains to a reputable company, it might significantly affect investor sentiment. There have been instances in the past where an incident at a large corporation had a significant effect on the market as a whole. While it is critical to monitor these trends, staying invested for the long term is more important for wealth creation.
How To Analyze Stock Market Trend?
Analysis of the stock market trends is the practice of analyzing present trends in order to forecast future trends. Using a study of share market trends, you may attempt to anticipate whether a certain market sector that is currently developing will continue to grow in the future. Or, will a market trend in one industry initiate a trend in another? This technique of analyzing share market movements entails a large amount of data, yet no one can anticipate the patterns with absolute certainty.
Analysis of share market trends is a subset of technical analysis that attempts to forecast the future movement of a stock based on historical data. A trend in the stock market is based on the notion that past price movements are indicative of future trends.
Some knowledge of markets and trends will provide insight into how markets function. Histories have demonstrated that patterns in bull and bear markets, the primary markets, last between one and three years. An analysis of the stock market will reveal that secular trends can last for a decade or longer. This is a fairly lengthy pattern. There may be intermediate trends inside any long-term trends that drive business journalists and analysts into a tizzy. There may be rapid adjustments in the present trend that cause markets to move in the opposite direction of the long-term trend. For instance, following an eight-month declining trend, a market may see a short-lived upswing, which may be the consequence of equally spontaneous political or economic moves and reactions.
The Bottom Line
As an investor, you must comprehend the rationale behind the trend of the stock market. Similar to how you wouldn’t drive on the wrong side of a one-way street, it is prudent to avoid investing against stock market trends.
To get the most out of trend analysis in the stock market, it is important to pay attention to the industry to which the stocks belong, any geopolitical or other variables that have influenced the stocks in that sector in the past, and how market sentiment has affected the stock in question. Therefore, prior to investing in any shares of a company, a stock market analysis will inform you precisely how to trade with that stock. It may also signify the proportion of capital to be invested in the stock.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch/hear on YouTube:
Start investing through a platform that brings goal planning and investing to your fingertips. Visit Kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.
#MutualFundSahiHai #KuveraSabseSahiHai!
