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How To Recognize A Stock Market Rally Before It Gets Going

Jason Markum

Everybody loves a stock market rally; well, ALMOST everybody loves a stock market rally. There’s one kind of person who hates the stock market rally and that person is the person who MISSED the stock market rally! (well, them and short sellers, but that’s a subject for another article!)

There’s nothing more frustrating than watching the market climb without you, only to buy it at the top once the rally is over. When this happens usually there’s nowhere left for the stock to go but down again!

So how do you recognize a stock market rally before it’s too late so that you can take advantage of it on the way up and make some money? Luckily for you, there are several ways to do it and that is exactly what I’m going to talk about in this article today.

Most stock market rallies don’t start without some sort of warning of some kind. Many times these rallies have been signaled for a long time before they actually start. You can get the data that you need in newspapers for the most part and also online if that is easier for you.

Here are just a few fairly accurate indicators that you can use to help predict when the market is likely to start staging a major advance, or rally.

First look at the declining member short sales ratio. People who are members of the New York Stock Exchange are usually pretty good traders and when they have stopped short selling, there’s usually a reason and that reason is usually that a big rally is on its way. Ratios of 78% and below are signs of optimism.

Next watch the Federal Reserve. When they lower interest rates it is usually a pretty good sign for an upcoming bullish stock market advance. Likewise if they drop the discount rate two times in a row without an intervening rise, this tends to indicate a long bull market as opposed to a shorter one.

Next watch for nonmember short sales that are increasing. When the general public has the most pessimism and is the most bearish you can often expect a market upturn, which may seem counter logical but it’s true nonetheless. To figure out the nonmember shorts, divide the amount of shares sold short by the public in any given week by the total trading volume of the New York Stock Exchange on that given week. If you see short sales in excess of 1.75% of total trading volume this is a good indicator of a market turnaround.

Finally be sure to read newspapers and magazines and watch financial news on TV because when the public media tends to be overly bearish for an extended period of time this can often indicate that the market is getting ready to rebound because the media always follows, it never leads. That’s their – job to report not create.

So there you have several ways for you to recognize a stock market rally before it gets going. Hopefully this will keep you from missing out on a really big gains in the future! But if you DO miss out, just remember….there’s always another bull market rally just around the corner!

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