If I was to ask you today, “Is the stock market in an uptrend, downtrend, or a lateral consolidation,” what would you answer?
Knowing the answer to this crucial question is essential for the stock market or even an individual stock. Why? If you buy a stock (go long) in an uptrend, you are more likely to make money on it.
If I was to show you a simple way to see for yourself if the market is heading upwards or downwards, would you be excited? First, let’s examine what types of trend exist:
What is an Uptrend & Downtrend in the Stock Market?
In the stock market, an uptrend is any stock price that is continuing to make new highs over time. In a downtrend, a stock price is making new lows over a given time period. The length of the price move defines whether the uptrend or downtrend is a short, medium, or long-term trend.
Types of Stock Price Trend
There are 3 types of stock price trends. The uptrend means that the price is moving upwards, and the downtrend means the stock price is moving downwards. The final trend is a consolidation or lateral move, meaning the price is moving sideways.
- Uptrend: The stock or index is moving up, making new highs or higher highs
- Downtrend: The stock or index is moving downwards, making lower lows
- Sideways consolidation: neither making significant new highs or new lows
There that was easy. Well, not quite. There are also time-frames to consider. For this, I will refer to Charles Dow’s classification.
Types of Stock Trend Timeframes
One can categorize stock trends into 3 general timeframes. Short-term trends last from days to weeks, and medium-term trends last from weeks to months. To be categorized as a long-term trend, the price needs to be trending for months to years.
- Short Term: Days to weeks
- Medium Term: Weeks to months
- Long Term: Months to years
By combining the above terms, you could be specific about the market trend. For example, you could say the market is in a short-term uptrend but a long-term downtrend. But isn’t that contradictory, the market being in both an uptrend and a downward trend at the same time? Not really; it makes perfect sense.
How to Identify the Trend of a Stock
The easiest way to identify a stock trend is to plot a simple moving average of a stock chart. If the stock price is above the moving average, it is in an uptrend. If the price is below the moving average, it is in a downtrend.
We can use moving averages to quickly assess if the market is in an up or downtrend and on what time frame. To do this, we need to set up three moving averages on a chart.
Using Moving Averages to Assess the Stock Trend
- Open your stock charting software.
- Set the chart price scale to logarithmic or percent.
- Select the timeframe to 1 day per bar.
- Set up a long-term moving average: Add the Moving Average indicator and set it to 200. Set the color to white. This is the moving average of 200 days of price history.
- Set up a medium-term moving average: Add Moving Average 100, with an orange color. This is the moving average of 100 days of price history.
- Set up a short-term moving average: Add Moving Average 20, with a green color. This is the moving average 20 days of price history.
You can now look at the chart; if the price is above the green line, the stock is in a short-term uptrend. If the price is above the orange moving average, the stock is in a medium-term uptrend. Finally, if the price is above the white 200-day moving average, it is in a long-term uptrend.
If the price is above the 200-day moving average, we can assume it is a long-term uptrend. Below, then it is in a long-term downtrend. 200 days = 10 months = months to years time frame.
If the price is above the 100-day moving average, we can assume it is in a medium-term uptrend because it is above 100 days = 5 months = weeks to months time frame.
The same goes for the 20-day moving average; this represents 20 days = days to weeks.
So now you know the theory, let’s look at the charts and draw our conclusion.
Long-term Uptrend & Downtrend Example
In this example, we can see 4 distinct phases of a stock trend. Firstly we observe the long-term downtrend as the stock market crashes. You can see the price is below the white 200 days moving average for an entire year.
Next, we can see that the price crosses through the white moving average indicators, meaning the market is now in an uptrend.
In the third phase, we see that the stock price moves continuously up and down through the white moving average indicator; this means it is in a sideways consolidation.
Finally, the price moves strongly up through the moving average 200 indicator, confirming the start of a new long-term uptrend.
Medium-term Uptrend Example
In this example, we are looking at 2 years of stock price data. We can clearly see that the stock price moved above the orange 100-day moving average indicator in September. This means the stock is in a medium-term uptrend. It is also above the 200-day moving average, meaning it is also in a long-term uptrend.
Short-term Uptrend Example
Using the 50-day moving average, we can observe 6 distinct uptrends and downtrends. Each is clearly visible when the stock price is above or below the green line.
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How to Scan for Trending Stocks
Most stock analysis programs allow you to scan for trending stocks. You can use stock screening to filter on all stocks above the 50-day moving average. Alternatively, you can filter for stocks that are making new all-time price highs.
How to Find Intraday Trending Stocks
If you want to find trending intraday stocks, you can use the 50, 100, and 200 moving average indicators. You will need to set the chart time-frame to be 1 minute or 5 minutes per bar.
Summary: Stock Price Uptrends & Downtrends
There is a simple process for assessing the trend of any stock. Simple plot 3 moving average indicators with different lengths onto a stock chart. I suggest 50, 100, and 200-day moving averages. You can then easily visualize the stock’s trend and the time-period of that trend.
Also, do not forget, short-term trends develop into medium-term trends, which can develop into long-term trends. Not that you understand stock trends using moving averages, you may want to learn how to draw trend-lines.