Predicting Bull and Bear Markets

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Predicting Bull and Bear Markets

Investors turn to market theories and complex calculations to figure out in advance when the market will scream upward or tumble downward. They are seeking the perfect market indicator into which they can put their numbers and await a neatly packed reply. In reality, however, no perfect indicator has been found.

Things To Know

  • Economists use technical analysis to predict the market.
  • The advance-decline line measures the difference between the number of stocks advancing in price and the number declining in price.

Using technical analysis to predict the market

In their attempts to predict the market, economists use technical analysis. Technical analysis is the use of market data to analyze individual stocks and the market as a whole. It is based on the ideas that supply and demand determine stock prices and that prices, in turn, also reflect the moods of investors.

How the advance-decline line works

One tool commonly used in technical analysis is the advance-decline line, which measures the difference between the number of stocks advancing in price and the number declining in price. Each day a "net advance" is determined by subtracting total declines from total advances. This total, when taken over time, makes up the advance-decline line, which analysts use to forecast market trends.

Generally, the A/D line moves up or down with the Dow. However, economists have noted that when the line declines while the Dow is moving upward, it indicates that the market is probably going to change direction and decline as well.