Follow the Leaders for Market Clues

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Follow the Leaders for Market Clues

After the daily general market averages, I would say the second most important indicator of primary changes in stock market direction is simply the way leading stocks act. After an advance in stocks for a couple of years or more, if the majority of the original price leaders top, you can be fairly sure the overall market is going to get into trouble. Of course, if you don't know how to recognize when the more aggressive market leaders are making tops and behaving in an abnormal fashion, this method of market analysis won't help you very much.

There are numerous indications of tops in individual stock leaders. Many of these securities will break out of their third or fourth price base formation on the way up. Most of these base structures will appear wider and looser in their price fluctuations and volatility and have definite faulty characteristics in their price patterns. A faulty base can best be recognized and analyzed by studying charts of a stock's daily or weekly price and volume history.

Some stocks will have climax tops with rapid price runups for two or three consecutive weeks. A few will have their first abnormal price break off the top and display an inability to rally more than a trivial amount from the lows of their correction. Still others will show a serious loss of upward momentum in their most recent quarterly earnings reports. The subject of when to sell individual stocks will be presented in great detail in the next two chapters.