How to invest in stocks in the current stock market scenario

The recent turmoil in the stock market has affected every investor who has invest in stocks. The recent ups and downs of the market has made it fairly difficult for mid term to long term investors to invest in stocks, so I'll like to touch on this issue and what to look out for in in order to still be able to make money in this market. The investor pessimism can be seen with the outflow of money from mutual funds out of the stock market into other types of financial instruments such as bonds. Dear beginner investors and traders, all is not lost! There may be a silver lining in the clouds after all.

As discussed in the previous articles, the first thing we have to do before we invest is any stock is to gauge the current stock market situation. Let's take a look at the 3 major stock market indexes, namely the Dow Jones, S&P500 and the Nasdaq Composite. These are the three indexes I use the monitor the strength of the stock markets.

Nasdaq Composite Index Watch

(Image courtesy of OptionsXpress. I invest in stocks with them :))

As you can see, the Nasdaq Composite has been trading within a range for the last six months or so. The resistance level (as seen by the trendline that the index has failed to penetrate from the upside, thus acting as a ceiling) is around 2300 or so while the support level (as seen by the trendline that the index has managed to stay above, thus acting as a floor) is about 2100 or so. I will mention about the circled regions later.

S&P 500 Index Watch

(Image courtesy of OptionsXpress. They provide a free on line trading software for their customers.)

As seen from the graph above, the S&P500 index has also been trading within a range for the last six months or so. The resistance level (as seen by the trendline that the index has failed to penetrate from the upside, thus acting as a ceiling) is around 1120 or so while the support level (as seen by the trendline that the index has managed to stay above, thus acting as a floor) is about 1040 or so. As mentioned previously, I will mention about the circled regions later.

Dow Jones Industrial Average Index Watch

(Image courtesy of OptionsXpress. I invest in stocks with them :))

As seen from the graph above, the Dow Jones Industrial Average index has also been acting in tandem with it's cousins in moving within a tight range. The resistance level (as seen by the trendline that the index has failed to penetrate from the upside, thus acting as a ceiling) is around 10700 or so while the support level (as seen by the trendline that the index has managed to stay above, thus acting as a floor) is about 9900 or so.

What can we conclude from all the analyses of these graphs if we want to invest in stocks?

The first important fact is that the stock market indexes seem to be trading within a range defined earlier. This is vital to know, especially when the stock market indexes are approaching these levels again as they might not be able to break through the resistance/support levels and will bounce off them once more. When this happens, we will notice a change in the trend again. You can prepare for this scenario in advance to protect your holdings or come up with strategies to take advantage of it.

The second important fact is that the stock market indexes are displaying strong volatility near the resistance and support levels (as seen in the badly drawn circles on the graphs). In fact, it is not surprisingly top have percentage changes of 2-3 percent in the days when the stock market indexes are near the support and resistance levels. As such, your portfolio can be greatly enriched or devastated in a matter of two or three days, depending on the type of stocks you happen to own at this time. Hence, it is important to catch the change in the trends quickly if you want to maximize the profits from the short trends that have been dogging the markets in the last six months. If you move too slowly, you will miss out a significant portion of the profits. That said, it is dangerous for beginners to move too quickly to a change in trends as they are often not experienced enough to tell whether it is genuine or not. Even experts make mistakes often in this type of unpredictable periods.

The third important fact is not shown on the graphs. The leading stocks (refer to my previous post on how to pick the best stocks for definition)that I track and buy or sell short have actually fared much better than the rest of the stock market indexes. The drop in price in terms of percentage was not as much and more importantly, the volume was low, thus signifying that the mutual funds and the financial institutions were not selling their shares but are hanging on to them. That is why I have not sold most of my holdings this time even though I usually advocate a must sell when the hit loss is at 7% or so. Within the last couple of days, my portfolio stock picks have recovered all its losses and are even showing some profits. Judging from the stock market index charts and barring any unfortunate events, the indexes should continue to rise until they are near their respective resistance levels. That is when I will monitor extremely carefully to see what comes up next. I do not make any predictions but will simply act based on the current stock market situation.

To summarize on how to do well in this unpredictable period, an investor who wants to invest in stocks must always have a keen sense of the market and how it is behaving, as well as the behavior of superior stocks that he/she has on his/her watchlist. Always have plans in place when the indexes approach their resistance or support levels and react accordingly to what happens next. If this is done well, there is huge money to be made if one decides to invest in stocks.

Tags:stock market, investing, trading, make money, stocks, finance, wealth building, stock market basics, invest stock