Why You Must Follow the Leaders

by Darrin Donnelly on September 20, 2011

Click on chart to enlarge.

Not all stock market rallies are created equal.

While analyzing the general market and determining what kind of trend we’re in is an essential component of successfully trading with the Darvas System (or any trend-following system), such analysis doesn’t tell us the WHOLE story about the health of the market.

This is because some market rallies are actually rather weak when you scratch below the surface.

For instance, 2009 gave us a notorious “junk off the bottom” market Uptrend.  While the general market lurched higher thanks to several rounds of government intervention, homerun stocks were few and far between and trying to navigate through the whipsaws of the market produced significant losses for many trend traders.

How can you confirm that an Uptrend is legitimate?

Obviously, trend-reading techniques such as analyzing sound chart patterns and evaluating Accumulation-versus-Distribution are the starting point.

But to truly determine the strength of the market, you must turn your focus to what leading stocks are doing.

Leading stocks are those with superior fundamentals AND technical action.  We refer to these stocks as “Darvas Stocks” – those elite growth stocks that are outperforming all the rest both fundamentally and technically.

The action of individual Darvas Stocks tells you how strong the market is.  There are often times when the behavior of these market leaders is the opposite of what the general stock market is doing.

For instance, take a look at the Apple stock chart that accompanies this article.  As you can see on September 19th, this stock broke out of its base as it blasted into new all-time highs on heavy volume.

However, on the same day this happened, the Dow Jones Industrial Average dropped more than 100 points on light volume.

What’s a trader to do when discrepancies between market leaders and the stock market in general occur?

You’d first want to make sure that you aren’t relying on one SINGLE stock’s performance for your trend evaluation.  If AAPL is blasting off, you want to check on other hot Darvas Stocks.  What are the other leaders doing?

In the case of AAPL’s September 19th breakout, several other leading stocks were notching new highs while the general market was selling off.

When this occurs, trust the action of leading stocks first and foremost.

The same concept holds true in the opposite direction.  If the market is moving higher, but leaders are sputtering and failing breakouts; it’s a giant red flag that the market’s health has weakened – even if, on the surface, the general market appears positive.

Remember, they’re called LEADERS for a reason.  They LEAD the market.

Access Darvas Trader PRO* The Darvas System is a powerful trend-trading method that makes money whether the market is going up or down, and also tells you exactly when you should be sitting on the sidelines.  It focuses on only trading true market leaders.  You can access our list of current Darvas Stocks – with EXACT buy points and sell points – by clicking here and instantly downloading Darvas Trader PRO.

{ 1 comment… read it below or add one }

Coralyn December 14, 2011 at 7:00 am

Smart thkinnig – a clever way of looking at it.

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