5-06 Watch the Volume!

Identify Market Tops to Maximize Profits

Market tops are subjective opinions that often quickly become fact, for better or worse. How can you possibly identify a market top? Here are some suggestions that many experts believe will help you identify market tops.

• Closely watch the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500. Pay particular attention to the relationship between volume and the index. At some point in a bull market, the volume will fade as the index continues to be strong—this is a bad sign that there aren’t any more buyers.
• Also watch the relationship between volume and your stock’s prices. Low volume doesn’t tell us much, but large volume helps support price movements.
• Track the above noted activity over a four or five day period. This trend often precedes an overall market downturn. Feeding upon itself, as an almost a self-fulfilling prophecy, the “mood” of the market also tends to change, becoming a bit of a bear rather quickly.

Rule #6 – Sell into rallies that have fading volume.

Try not to miss these market top indicators. You may lose profits you’ve already achieved. If you have been on a good streak, you don’t want to quickly change from offense to defense if you can avoid doing so. Identifying market tops can be a profitable component to your market strategy in both the short and long term.