Unlocking Market Breadth: Your Guide to Understanding Market Strength
Are you a beginner in the stock market, wondering when to enter or exit your investments? Understanding market timing can be daunting, but with a few simple tools, you can gain valuable insights into market trends. Let's delve into three basic scanners that analyze market strength, even if you're not a finance whiz.
1. Analyzing the Percentage of Stocks Below the 200-day Moving Average (DMA)
Imagine the stock market as a roller coaster. Sometimes it's high up, sometimes it's low down. One way to measure this is by looking at how many stocks are trading below their average price over the past 200 days. Think of it as a sort of health check for the market.
What to Look For: When more than 30% of the stocks are trading below their 200-day average, it could signal a market slowdown. But if that number hits between 60% to 80%, it might be a good time to start thinking about investing for the long term.
How to Use It: Watch for times when the "pink line" on the chart is high. This could indicate the market hitting a bottom and a potential bull run ahead.
2. Analyzing the Percentage of Stocks Above or Below the 20-day Moving Average
Do you prefer to invest gradually over time rather than all at once? If you like to do SIPs then this tool may give you 3-4 opportunities to invest in the market in a particular year.
How It Works: This is similar to the first scanner, but this time we're looking at a shorter timeframe (20 days instead of 200). When the "brown line" is at the maximum (top), it could signal a good time to start buying as it says a bottom has formed in the market or Index. Conversely, when the "blue line" peaks, it might be time to consider trimming your positions and buying again when the market corrects.
3. RSI Distribution
Here's where things get a bit technical, but don't worry, we'll keep it simple.
What is RSI?: It stands for Relative Strength Index, which basically measures how strong or weak the market is. When it's below 50, it might be a good time to start buying.
How to Use It: Keep an eye on the monthly RSI. When it's below 50, it could mean the market is weak, but also a good opportunity to start accumulating stocks. You can also combine this with the 40 Monthly EMA (Exponential Moving Average) for added insight.
Look at the RSI distribution chart below, whenever, the “orange” line is at the top it has represented a market correction and a good opportunity to buy.
These three scanners are like tools in your toolbox, helping you gauge whether the market is strong or weak. Remember, investing in the stock market always carries risks, but with a little knowledge and the right tools, you can make more informed decisions. Happy investing!