​​​Trading Signals are powerful tools that help traders to recognize and take advantage of the market momentum. Markets do provide signals of an impending correction or a break-out. Investors are always looking for clues as to what’s going to happen next in the markets.

 Signs of a Market Top

The following three market indicators will help provide insight into the underlying strength or weakness of the market. The first two signals are often present before a top is made, while the third signal acts as a timing indicator to show prices are headed lower.

1) The number of stocks hitting 52-week highs begins to decline, despite growth in indexes. If the number of stocks hitting 52-week highs declines, this indicates that fewer stocks are working to push the market higher. 

2) The advance/decline ratio of shares has peaked and is now declining, even though the indices continue higher or have stalled. This indicates that while the selective market indexes are moving higher, the broader market is struggling. 

3) The major indexes move below a prior high. This is the ultimate confirmation of trouble. In an uptrend, prices make higher highs and higher lows. Therefore, when prices fail to make higher highs, or create a lower low than the previous low, the uptrend has failed. 

Ultimately, the third signal will provide the timing indicator. It is possible that while the advance/decline ratio and the number of 52-week highs may be decreasing, the major indexes may continue to move higher, although the number of stocks participating may be declining. Therefore, when all the three signals align, it indicates that the market is going to have a large correction. This can allow investors to take profits and then move to the sidelines.

BREAKOUT SIGNALS

A break out occurs when the price of a stock or index exits an area pattern. Often times, a stock or index will bounce between the areas of Support and Resistance and when it breaks through either one of these barriers, you can consider the direction that it’s heading in as a trend. Often the resistance level the price breaks through becomes a new support level, and vice versa. This can be a “Buy” or “Sell” signal depending on which barrier it broke through. If the Resistance barrier is broke through decisively, then the concerned stock or index is heading for a new high and it is a “Buy” signal.
A breakout is a stock price moving outside defined Support or Resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above Resistance or enters a short position after the stock breaks below Support.

Warning signals from other Markets

Sometimes, Bond Markets flash warning signals for stock markets. Falling interest rates send a warning signal to the stock market. Falling bond yields send a message that the economy is slowing, and that could mean trouble for stocks. Bond yields move in opposite direction to bond prices. So the lower move in interest rates suggests investors are finding safety in bonds and hence trouble for stocks. 

Other early warning signs of market crash

The telltale sign of a market crash is a measure of co-movement, or the likelihood of stocks to move in the same direction. When a market is healthy, co-movement is low. But in the months and years before a crash, co-movement seems to grow. Regardless of whether stock prices go up or down or stay the same, they do so in tandem. People are copying each other, and a small nudge can send everyone in the same direction. The system appears primed for collapse.