Monitor the stock market when investing in stocks, because three out of four stocks move with the market. To monitor the market, first establish the market’s overall direction (up, down or sideways) and then check it daily to make sure that it is acting normally (moving in the same direction) or abnormally (flashing warning signals of a possible change of direction).
Select the tools. Most online brokers and many free financial websites provide free quotes for stocks and major stock market indexes. It is best to monitor all three major indexes -- the Dow Jones Industrial Average (or the New York Stock Exchange Composite), S&P 500 and NASDAQ. Most quotes come with the intraday and daily trading volume, which should be studied carefully in conjunction with price changes. Alternatively, watch the three exchange traded funds (ETFs) that mimic the performance of those indexes -- DIA, SPY and QQQ.
Determine the market’s primary direction. Study the daily charts of the major indexes. An uptrend is characterized by a series of higher highs and higher lows, a downtrend – by a series of lower highs and lower lows. A “higher high” means that when the market makes a new high, it is higher than the previous high; a “higher low” means that when the market makes a new low, it is higher than the previous low. The whole movement resembles a staircase or a series of rising waves. Things work in reverse in a downtrend: lower highs and lower lows.
Check the market’s pulse periodically. Unless you day trade any of the three index ETFs, you don’t need to monitor the averages continuously throughout the day. Check the market at the open, around noon, at 2 p.m. and at the close to establish whether the action is normal or abnormal.
Stay put if the action is normal. Normal action means that daily prices stay within the established price range and move in the established primary direction. Price action must be confirmed by volume. Volume can fluctuate from day to day but generally should go with the trend: in a rising market, stocks should advance on high volume and decline on low volume; in a declining market they should decline on high volume and rise on low volume.
Be prepared to act if the action is abnormal. Abnormal action is anything out of the established range. Unusually high volume, large daily price/index value changes, gaps (prices opening higher or lower than they closed the day before with no trades in between) and divergence (indexes moving in different directions on the day, such as the Dow closing up and the NASDAQ closing down) can all be warning signs that the trend is changing. If the market is flashing a warning sign, monitor it more closely for a confirmation of the change of direction.