What Is a Technically Strong Market?

The stock market or a segment of the market is said to be technically strong if it reflects strong numbers or positive data points for several indicators that are regularly tracked by stock and market analysts.

Key indicators watched by technical analysts include the advance/decline line (A/D), the Arms Index (TRIN), and the moving averages. Naturally, the opposite of a technically strong market is a technically weak market. The key indicators suggest probable losers as well as probable winners.

Key Takeaways

  • Analysts watch several indicators to determine whether there is a technically strong market for a stock, a sector, or the markets as a whole.
  • Key indicators watched by technical analysts include the advance/decline line (A/D), the Arms Index (TRIN), and the moving averages.
  • Other technical indicators include new high/new low, Bollinger Bands, RSI/Stochastics, the CBOE put/call ratio, the ISEE put/call ratio, and the VIX.
  • Technical analysts believe that the markets move in predictable trends that can be exploited by traders.
  • The goal is to identify the best times to buy and sell individual stocks or a basket of stocks based on the value of the key indicators.

Understanding a Technically Strong Market

Technical analysts try to profit from trends in the price of a single stock, an industry sector, or the markets as a whole. They believe that historical pricing trends tend to repeat themselves.

By using price charts to track trends over time, they aim to identify the best times to buy and sell in order to make a profit. When they spot a technically strong market for a security, a basket of securities, or a broad index, they buy them with the expectation that their prices will rise.

  • The advance/decline line (A/D) shows the number of stocks that close at a higher price and the number that close at a lower price over a series of days or weeks.
  • The Arms Index (TRIN) compares the number of stocks increasing and decreasing in price at the close with the increase or decrease in volume on the same day. When viewed over time, it is seen as an indicator of the level at which the markets are "overbought" or "oversold" and therefore are due for a correction or likely to rise.
  • The moving average calculates the average price of a stock share over a period of time. It smooths out the constant fluctuations in the price of a stock, identifying a number that it is likely to exceed or fall short of in the short-term future.

Other technical indicators that stock market analysts or investors can use to predict the movement of the market include new high/new low, Bollinger Bands, RSI/Stochastics, the CBOE put/call ratio, the ISEE put/call ratio, and the VIX.

About Technical Analysis

Technical analysis is notably free of any considerations of the actual quality of a stock or the company behind it. It's the trend that counts, and the trend determines the direction of its price. Technical indicators can signal a strong market (or a weak market) but this only provides a short-term view. Long-term views, though also hard to predict, are better suited to understanding the fundamentals of a company or industry.

If there are more buyers than sellers for a stock, its price will rise. If there are more sellers than buyers, the price will fall. That's the law of supply and demand, and it's the essential fact of the markets.

Fundamental analysis is the other main professional system of stock-picking. Followers of this system examine the financials of a company, its management, and its past performance to conclude whether it is worth more or less than its current stock price suggests and based on that information, how others may value it by buying or selling its shares.

Though both technical and fundamental indicators provide a significant amount of insight, it is still impossible to determine the high or low of an asset. For this reason, it is important to conduct a thorough analysis utilizing a variety of metrics to determine whether the current price of an asset is overbought or oversold, allowing an individual to make the best trading decision.