The following information is provided to assist you in
understanding the basics of
Step #1 - Determining Market Direction.
In these FAQs, we cover . . .
What is Market Direction?
What
is the process for determining Market Direction?
What is a Market Configuration?
What are the Moving Averages
Components of a Market Configuration?
How are Moving Averages calculated?
How
are Market Configurations used to determine Market Direction?
What
are the major Market Configurations that pertain to each Market Stage?
Why
is determining Market Direction and Stage so important?
Where
can we learn more about Market Direction?
So,
without further adieu . . .
What
is Market Direction?
Answer: Let’s
break it down.
When
we use the word
“Market”, in this Web, we mean a collection of stocks which in
the aggregate can be measured by a reliable Index. For example, all stocks
traded on the New York Stock Exchange (“NYSE”) constitute a “Market”
since their aggregate movements are reliably measured by the NYSE Composite
Index.
The word
“Direction”, we can think of generally in the conventional sense, but
specifically, in discussing Market Direction, we refer to: Bullish (like in an
upwardly moving Market); Bearish (like in a downwardly moving Market), or;
Uncertain (as in a sideways, pausing or changing Market).
Professor
Profit’s Paradigm considers Market Direction for two Markets: the
NYSE, and; the National Association of Securities Dealers Automated Quotation
system (“NASDAQ”).
What
is the process for determining Market Direction?
Answer: Every
Sunday, we gather the most recent data for the NYSE and NASDAQ.
We only use weekly data – the value and statistics of each Index as of each
Friday’s close. We then update the Markets histories, calculate each of the
Moving Averages Components, and determine the Market Configuration that tells
us the Direction/Stage of each Market.
The result of this determination is not
a forecast of what is to come. It is a reading as to where each Market is and
the direction each Market was heading when last observed (i.e., as of the
previous Friday’s close). Market Direction (ultimately articulated as one of
five Stages) serves as the foundation for how we view the status of each of
the hundreds of stocks monitored in Professor
Profit’s Universe of Desirable Stocks and in our model of held positions, Professor
Profit’s Portfolio.
What
is a Market Configuration?
Answer: A
Market Configuration, for our purposes here, is a specific combination of
Moving Averages Components pertaining to a specific Market.
What
are the Moving Averages Components of a Market
Configuration?
Answer: A
Market Configuration consists of four Moving Averages Components, as follows:
-
15 week Moving Average of
“Advances minus Declines” of all stocks measured by the subject Market
Index – utilized to monitor the subject Market’s momentum.
“Advances” is the number of stocks in the Market that increased
in price during the measured week. “Declines”
is the number of stocks in the Market that decreased in price during the
measured week. Thus, “Advances minus
Declines” is the number of Declines subtracted from the number of
Advances, resulting in a single net number for each week. This weekly number can
be either positive (in the event that more stocks rose in price) or negative (in
the event that more stocks fell in price). In fact, the 15 week Moving Average
can be either positive or negative – it doesn’t really matter. What
is important is to know whether the Average moved UP or DOWN in relation to the
previous week.
A commonly used abbreviation or
shorthand for this Moving Average within this Web is “[Index]
AD15wk”.
-
5
week Moving Average of the subject Market Index
– utilized to monitor short-term movement of the Index. The most important
things to know about this Moving Average are:
-
rank
(i.e., whether the 5 week has the Highest,
Center, or Lowest value when compared to the 15 week and 40 week Averages
for the same week), and sometimes
The
commonly used abbreviation or shorthand for the 5 week Moving Average within this Web
is “[Index]
5wk”.
-
15
week Moving Average of the subject Market Index
– utilized to monitor intermediate-term movement of the Index. Like the 5
week, the most important thing to know about this Moving Average is:
-
rank
(i.e., whether the 15 week has the Highest, Center, or Lowest value when compared to the 5 week and 40
week Averages for the same week).
Direction
for this Moving Average has no relevance..
The
commonly used abbreviation or shorthand for the 15 week Moving Average within this Web
is “[Index]
15wk”.
-
40
week Moving Average of the subject Market Index
– utilized to monitor long-term movement of the Index. Again, the most
important things to know about this Moving Average are:
-
rank
(i.e., whether the 40 week has the Highest, Center, or Lowest value when compared to the 5 week and 15
week Averages for the same week), and
The
commonly used abbreviation or shorthand for the 40 week Moving Average within this Web
is “[Index]
40wk”.
So, as
an example looking at the hypothetical “XYZ Market”, if the . . .
-
“XYZ
AD15wk”
was at 157 the previous
week and is at 144 for this week (i.e., it moved DOWN), and the
-
“XYZ
5wk” was at 21.8 the previous
week and is at 23.3 for this week (i.e., it is the CENTER of the Index Moving
Averages and it moved UP), and the
-
“XYZ 15wk”
was at 24.6 the previous
week and is at 23.1 for this week (i.e., it is the LOWEST of the Index Moving
Averages and it moved DOWN), and the
-
“XYZ
40wk”
was at 26.2 the previous
week and is at 25.0 for this week (i.e., it is the HIGHEST of the Index Moving
Averages and it moved DOWN),
.
. . then the XYZ Market Configuration Chart for this week would look like this:
|
Current
XYZ Market Configuration
|
|
XYZ AD15wk - DOWN
|
|
XYZ 40wk - DOWN
XYZ 5wk
– UP
XYZ 15wk -
DOWN
|
How
are Moving Averages calculated?
Answer: Think
of Moving Averages in the convention sense. Moving Averages are great for
directional charting because they tend to smooth-out the ups and downs in fluctuating data. Let’s look at an example
for the “XYZ Index”:
|
Friday's
Date
|
Weekly Close of the
XYZ Index
|
5
week Moving Average
|
|
January 7
|
20
|
-
|
|
January 14
|
22
|
-
|
|
January 21
|
22
|
-
|
|
January 28
|
21
|
-
|
|
February 4
|
24
|
21.8
|
|
February 11
|
27
|
23.2
|
In the
table above, the average for the 5 week period ending February 4, is 21.8 (that
is, the average of 20, 22, 22, 21 and 24 = 21.8). The average for the 5 week
period ending February 11, is 23.2 (that is, the average of 22, 22, 21, 24 and
27 = 23.2). It can be said that the 5 week average for XYZ “moved” from 21.8
to 23.2 from February 4 to February 11. Thus the term, Moving Averages.
How
are Market Configurations used to determine Market Direction?
Answer: Thanks
to Zahorchak, the major Market Configurations have been rather neatly classified
into groupings that lend themselves to Market Direction identification. We take Zahorchak’s work a bit further by
labeling the groupings in such a way as to correspond with 5 major “Stages”
of Market Direction, as follows:
-
Stage
1 – Uncertain, but probably just a Bear
Market rally;
-
Stage
2 – Uncertain, but
possibly the 1st sign of the formation of a new Bull Market;
-
Stage
3 – Bullish: 2nd sign of the
formation of a new Bull Market -or- We are experiencing Bull Market conditions;
-
Stage
4 – Uncertain, but possibly the 1st
sign of the formation of a new Bear Market, and;
-
Stage
5 – Bearish: We are experiencing Bear
Market conditions.
What
are the major Market Configurations that pertain to each Market Stage?
Answer: The
major Market Configurations are laid-out in tables at:
Major
Market Configuration Tables
Why
is determining Market Direction and Stage so important?
Answer: Very simply, if we have a handle on the direction of the
market and we invest in stocks characteristic of that direction, we improve our odds of profitability.
Another way
to say this is, knowing the Market Direction and Stage allows us to reduce risk by avoiding transactions that go against the
grain of the Market. It will becomes evident in Steps #2 and #3 how Market Direction and
the Stage of the Market impact our take on individual stocks as candidates to
Buy, Sell, Short, or Cover.
Where
can we learn more about Market Direction?
Answer:
There is much to learn about Market Direction. Try Learn
More.
That concludes the Step #1 FAQs
Next:
Back to Tutorial Step #1
Continue to Tutorial Step #2
Continue to Step #2 FAQs
Learn More | 
