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What Is a Stock Trend Analysis?

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  • Written By: Ray Hawk
  • Edited By: E. E. Hubbard
  • Last Modified Date: 16 November 2016
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Stock trend analysis is a method of looking at broad technical indicators in an individual stock, sector, or overall market to determine whether the general direction is an uptrend or downtrend. This method of stock analysis is usually performed for longer term investing. It is used to determine when to invest into a market, then watched over time to determine when the market has peaked or bottomed out so that the investment level can be changed.

Most trend analyses look for uptrends, or a rising value in a stock, as the traditional investor attempts to buy low and sell high. The fundamental features of stock trend analysis that are looked for in an uptrend include the fact that the price of the stock is rising, that when the stock falls in the short-term, it does not fall as far as it rises, and that trading volume for the stock is higher when it is on the rise. Each of these indicators put together will show a pattern of gradual increase in the value of the stock despite shorter term fluctuations, and these indicators are referred to as moving averages.

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Traders who regularly employ stock trend analysis are doing what is known as momentum trading. It is a method used in seeking profits both on the traditional stock markets, as well as the commodities market and the currency exchange market. The focus is on the overall trend, and much less concern is placed on the inherent value of individual companies or industry sectors.

Types of stocks that are focused primarily on market trends include stock indexes and mutual funds. Many of these types of investments are tied closely to individual stock market trends, such as the Dow Jones Industrial Average index (DJX), a list of the 30 largest New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ) stocks on the US trading market. Any attempt at trend analysis will first look at broad stock market trends on a national level, such as indicators in the United States for the Dow Jones, Standard & Poors 500, and NASDAQ markets.

In analyzing trends, traders will typically set up a stock trend analysis that calculates a periodic 10-day and 30-day moving average for the investment sector of interest. If the 10-day moving average has risen above that of the previous 30-day moving average, the sector is considered to be on an uptrend. If the 10-day moving average is lower than that of the previous 30 days, it is on a downtrend.

There are also exponential moving averages in stock trends, where the current value of a stock is given greater weight than past value, due to unique circumstances in the market. Sideways consolidation is also looked at closely, where an investment sector maintains a slightly fluctuating price as supply and demand balance out. A sideways trend will eventually end with a typical return for the sector to its previous direction, whether up or down. Though stock trend analysis is based largely on past performance of a stock, it is seen as fundamental to all securities trading as it familiarizes investors with the way in which market trends shape up over a long-term basis.

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