Stock Market Timing

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Beginning investors are often misled into believing that there is no such thing as timing the stock market. This fallacy has been passed down on Wall Street to keep you fully invested at all times. All this does is diminish your returns. The fact is that it is possible to time your stock market investments so that at least you are in the market when it's overall trend is going up and you get out when the market is going down.

This stock market investment strategy is called CANSLIM. The "M" stands for market direction. This strategy dictates that before you invest in the market, you spend some time analyzing the overall market indexes first, to see if they are trending upward. If they are then it's an excellent time to invest. If not, you should move your investments to cash and sell your stocks.

The key behind this strategy is reviewing the price and volume action of the major market indexes each day. The indexes you need to follow are the S&P 500, the Dow Jones Industrial Average, the NASDAQ and the New York Stock Exchange Composite index. What you are looking for is whether or not the index increased in price or decreased in price from the prior session. But, you cannot look at the price alone. You also need to review the volume of the stock market for that day as well.

If the market closes down in price on volume higher than the day before, this indicates that market is under selling pressure. While one day of selling won't affect the overall trend, four to five days of this over a few week period are your signal to get out.

Once you've been kicked out of the market, it's then time to figure out what signals your opportunity to return to the market. This is done by watching the same indexes. Once an index closes higher on higher volume, the market is now in an attempted rally. But this rally may succeed or it may not. What you are looking for now is a follow through day to confirm the rally. You can spot this when one of the indexes spikes up on anywhere from the fourth to seventh day more than 1.7 percent on heavy volume. If it's a strong follow through day, you'd expect each index to be up and for volume to be up at least fifty percent higher than the previous session.

By studying the market indexes and learning the signals of distribution days and follow through days, you can learn to time the stock market. Once you learn this essential skill, you have more of an opportunity to pick winning stocks and are less likely to be buying stocks when the market is working against you.