One of the best indicator when observing the strength or weakness of a single stock is comparing it with the present market behavior. When the rest of the market are rising and the stock did not move, it is a sign of weakness that the stock might continue to fall further and vice versa.
Watch stock that show resistance when the market is weak and buy that stock. This kind of stock normally resist to go down when market are weak and start to swing up when good news appear. This is an indication that smart monies are buying and believe that they can sell later at a higher price. Smart monies will take advantage of the weak market and absorb any selling pressure as they are expecting more good news for the stock.
Testing
Smart monies does not buy or sell blindly, they start buying shares to see how easily they can buy them and sell to see how the market are able to absorb their selling. They often chose the path of the least resistance and that will determine whether the stock price will rise or fall.
Support and Resistance
When smart monies see that a stock is under value and the company is expecting good profits ahead, they quietly buy all they can at a certain depress price level. Once they bought enough, they just have to wait for the company good result to push up the stock price. This why rallies happened and smart monies are able to sell their stocks to small investors who purchase on those rallies.
Once they have unload their stocks at a higher price, the rallied had make the stock become overvalue or when they see trouble ahead (e.g. the trade war between USA and China), they are likely to use the news to sell down the stocks. This what we called the gap down.
The Bull Process of Rotation
Bull market are started by index stocks as they are the leaders. Index stocks affect sentiments as they are reported daily on television, internet news site and local newspaper. The public will soon be attracted to the market as medium and small speculative stock price being to rise. The public buying demand will start to increase as the index move higher and small investors start to make easy money without much thinking and effort. After a prolong increase, business begin to hit their maximum capacity and stock analyst target price keep getting higher (for example, pushing gloves stock higher and higher during the start of COVID-19 pandemic till the stock price run up above valuation). The higher price distribution to the small investors are usually more or less done at this stage and stock price become immune to any good news. At this stage, earning are often missed and smart monies will take this opportunity to gap down the stock price.
The Bear Process of Rotation
The start of the bear market begin when supply rotate to breaks down prices in one sector after another until they are exhausted. There will be some stocks that hit their bottom sooner than others. Index stocks are usually the leaders and once their decline stop, so will other sector of the stocks stop declining. Bear market drive on fear and many investors dump their stocks without any regard to value. At this stage, public sentiments are negative and stock prices are cheap. Smart monies who know the value of each company will once again start to accumulate their holdings and the bull cycle will be repeated again.
