How Technicians Spot Trends

SOME professional stock watchers called technical analysts have several theories worth knowing about. To judge when the market is ready to make a major move, technicians study a number of indicators.

One is called momentum. This means the speed with which market averages, such as the Standard & Poor's 500 stock index, rise or fall. If the index continues rising, but at a slower and slower rate every day, it may be heading for a fall.

Another technical measure is trading volume, the number of shares changing hands. It is a good sign when volume is large on days that the market rises and small on days that it sags.

Yet another measure is called on balance volume. For example, if the market rises on volume of 100 million shares one day and then falls the next day on only 60 million, the on balance volume is plus 40. That is a bullish omen. But when the on balance volume turns down, watch out. It could be a signal that the pent up buying power is nearly exhausted and that stock values are about to sag.

Then there is the advance/decline line. Very simply, it is a daily count of the number of stocks that rise and the number that fall. When the gainers outnumber losers, the advance/decline line goes up; that is a sign that the market is getting stronger. When losers predominate, the advance/decline line goes down. That is a sign of weakness in the market.

One sign that a rising market could be heading for a fall is when different stock market indexes say conflicting things. For example, if the Dow Jones Industrial Average is rising at the same time that the Standard & Poor's 500 stock index is falling, that is a cautionary indication.

Another so called technical indicator is how much money mutual fund managers are keeping in cash instead of in stocks. Traditionally, if they have more than 7% of their assets in cash, it is a favorable sign for the market: the money might go into stocks.

Market peaks also are marked by clear signs of speculation. Two of the surest occur when small investors start borrowing heavily to buy on margin and when small company stocks all seem to be scoring huge gains.