The ability to accurately evaluate the condition and direction of the general market is another skill generally required to become a successful investor. Developing this skill requires examination of the movement within the major market indicators. Each issue of Investor’s Business Daily contains a one-page graphic display of the three most widely followed major market indices, plus IBD’s Mutual Fund Index and several other leading sector indices.

- The NASDAQ Composite is a market value-weighted index that measures the performance of all securities listed on the NASDAQ market.

- The Standard & Poor’s Index of 500 Stocks (S&P 500) is also a market value-weighted index comprised of 500 of the most widely held common stocks from the NASDAQ, NYSE, and AMEX markets.

- The Dow Jones Industrial Average is a price-weighted average of 30 of the largest, most actively traded stocks in the market.

On our Web site, you can look at current market activity (price & price change) in The Markets, which is on the home page of investors.com.

SPOTTING MARKET TRENDS

The best way to determine the direction of the market is to follow and understand every day what the general market averages are doing. —William J. O’Neil

The ability to spot trends in the general market is a key skill essential to successful investing using the CAN SLIM® Investment Research Tool. Recognizing when the market has hit a top or bottomed out can be 50 percent of the selection process. Always remember that you can be correct on all of the other CAN SLIM criteria, but if you are wrong about the market’s direction, your chances of making money in a stock are limited.

Analyzing each index’s daily price and volume activity can tell you if the market is reaching a top or whether it has bottomed out. An investor must be able to identify these conditions, and react quickly to each one. Every day, Investor’s Business Daily explains these indices in depth in the “The Big Picture” column. This column gives an unbiased interpretation of the markets activity.

- Identifying Market Tops

Historically, market tops occur after the averages move into new high ground and show several days of large and increased volume with either very poor price progress or actual declines in the averages. Market tops are easy to miss because they usually occur on only one or two days. This is why it is so critical to study these indices on a daily basis. If you are not checking IBD’s general market page daily, it’s easy to miss market tops or the beginning of major new market upswings.

When the market indices peak and begin major reversals, you should move quickly and sell some of your stocks. Remember, it rarely pays to fight the general market; it’s the fastest way to lose money in stocks.

- Identifying Market Bottoms

Once you’ve recognized a market’s top, you need a way of determining when the market has bottomed out and ready to trend higher. Here again, the general market indices are your greatest allies.

As you watch the indices closely each day, look for the first attempt at a rally. If the rally follows through anywhere from the fourth to tenth day of the rally (preferably by the seventh day), it is an indication of a new uptrend. Be careful not to jump into a rally on the first or second day. For a valid follow through day, look for an increase in total market volume from the day before and substantial price progress for the day up at least 1.7 percent or more in any index. The follow through indication can occur on any one index: the Dow, S&P 500, or Nasdaq Composite.

For the individual investor, it is almost always wise to wait for this follow through day before you return to investing heavily in stocks. Waiting for a follow through day can keep you from getting suckered into the numerous phony rallies that occur in bear markets. When a new bull market is ready to start, you should rarely miss it, because the market will always show this follow through day.

Even if you are out of the market because you feel it’s too bearish, it’s vital to keep checking IBD’s general market indices each daily. At some point when you least expect it, the market will suddenly turn, follow through and begin the next new roaring bull market, which is where the real big money can potentially be made!

IBD University has an entire chapter on the subject of market analysis -