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 individual stocks. Why? If you buy a stock (go long) in an uptrend, you will likely make money on it.
If I were to show you a simple way to see if the market is heading upwards or downwards, would you be excited? First, let’s examine what types of trends exist.
What is an Uptrend & Downtrend in the Stock Market?
In the stock market, an uptrend is any stock price continuing to make new highs over time. In a downtrend, a stock price makes new lows over a given 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 Trends
There are three types of stock price trends. The uptrend means 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 moves 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 nor new lows
There that was easy. Well, not quite. There are also timeframes to consider. For this, I will refer to Charles Dow’s classification.
Types of Stock Trend Timeframes
One can categorize stock trends into three 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 must trend for months to years.
- Short Term: Days to weeks
- Medium Term: Weeks to months
- Long Term: Months to years
You could be specific about the market trend by combining the above terms. 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 simultaneously?
Not really; it makes perfect sense.
What is a short-term trend in stocks?
A short-term trend in stocks is a price movement that lasts from days to weeks. For example, a stock may move up quickly over the course of a few days and then start to decline again after that. Short-term trends can be identified by looking at indicators such as technical analysis or a chart pattern.
What is a medium-term trend in stocks?
A medium-term trend in stocks is a price movement that lasts from weeks to months. Medium-term trends are longer than short-term trends and can be identified by looking at a daily chart.
What is a long-term trend in stocks?
A long-term trend in stocks is a price movement that lasts from months to years. Long-term trends can be identified by looking at higher time frames, such as weekly or monthly charts. Such long-term trends are usually more reliable than short-term ones, but they take longer to develop.
What is an uptrend in a stock chart?
An uptrend can be identified in a stock chart when the price is making higher highs and higher lows on a consistent basis. This means that each successive high point is higher than the preceding high, and each low point is also increasing in value, albeit less significantly.
What is a downtrend in a stock chart?
A downtrend can be identified in a stock chart when the price is making lower highs and lower lows on a consistent basis. This means that each successive high point is lower than the preceding high, and each low point is also decreasing in value, albeit less significantly.
By combining short-term uptrends with long-term downtrends, traders can gain better insight into the overall trend of the stock and develop effective trading strategies. This is why it’s important to consider both short-term and long-term trends when analyzing a stock chart.
What is sideways consolidation in a stock chart?
Sideways consolidation in a stock chart is the trading pattern that appears when a stock price is stuck in a narrow range over an extended period of time. This can be seen as a period of indecision, where neither bulls nor bears are able to gain control of the trend. During this time, traders will often try to identify key support and resistance levels to help determine where the stock may next move. If this range breaks either to the upside or downside, it can often lead to a big move in that direction and potentially provide traders with profitable trading opportunities.
So, when analyzing a stock chart, it’s important for traders to not only take into account the short-term trends but also the sideways consolidation patterns that may be forming. By doing so, traders will be able to better identify potential trading opportunities and potentially more profitable trades.
Some charting software like TradingView offer pattern recognition that can help illustrate support and resistance levels when analyzing a chart for a potential trade.
Additionally, traders may also use other technical indicators, such as moving averages or support and resistance levels, to help identify potential entry and exit points for trades.
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 a downtrend.
We can use moving averages to quickly assess if the market is in an up or downtrend and in what time frame. We need to set up three moving averages on a chart to do this.
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 a Moving Average of 100 with an orange color. This is the moving average of 100 days of price history.
- Set up a short-term moving average: Add a Moving Average of 20 with a green color. This is the moving average of 20 days of price history.
You can now look at the chart; the stock is in a short-term uptrend if the price is above the green line. The stock is in a medium-term uptrend if the price is above the orange moving average. Finally, if the price is above the white 200-day moving average, it is in a long-term uptrend.
If the price exceeds 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 four distinct phases of a stock trend. Firstly we observe the long-term downtrend as the stock market crashes. The price has been 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, 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 two 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 and is in a long-term uptrend.
Short-term Uptrend Example
Using the 50-day moving average, we can observe six 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 making new all-time price highs.
How to Find Intraday Trending Stocks
You can use the 50, 100, and 200 moving average indicators to find trending intraday stocks. You must set the chart time frame to be 1 minute or 5 minutes per bar.
Is the Stock Market in an Uptrend or Downtrend?
If a broad market index like the S&P 500 or the Russell 2000 is above the 200-day moving average, the stock market is in an uptrend. If the price is below, it is in a downtrend.
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 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, but you may want to learn how to draw trend lines.
Love the simplicity of your explanations
I just registered to your site today and am glued to my computer. each article is getting better than the other. I am really impressed by the minute of details covered behind the statistics of something which is so useful but neglected by traders. This is very helpful.
Thank you Barry.
an easy way to find the trend