How to Determine the Health of the Market

by Darrin Donnelly on February 16, 2016

Nicolas Darvas (along with so many other legendary traders) said that knowing the health of the general market was CRUCIAL to his strategy’s success.  Darvas knew that one couldn’t rely solely on the action of individual stocks.  The market’s overall direction had to be clearly determined before Darvas would make a trade.

Determining the health of the market isn’t as easy as it sounds.

In hindsight, anyone can see when the market was bullish, when it was bearish, and when it was choppy.  You simply look at a long-term chart and say, “Here’s where it was going up, here’s where it was going down, and here’s where it was moving mostly sideways.”  Sounds simple enough, right?

But when you’re trading the market every day and you’re in the heat of the battle, it can be much more difficult to rationally decipher just how healthy or unhealthy the market is.  

“Is this just a short Uptrend or are we in the early stages of a new bull market?”  “Is the latest sharp pullback the end of an Uptrend or simply a constructive resting period?”  “Did the recent reversal signal a trend shift or is a whipsaw environment destined to continue?”

These are the types of questions traders must constantly try to answer – and the answers aren’t always clear.

The following list includes 10 distinct signs that the market is in an Uptrend.  The market can stay in good health even if it’s violating a few of these signposts, but the more violations you start to see, the more trouble a bull market is getting itself into.

1. Leading growth stocks and popular names are outperforming the indices.
Leaders are called leaders for a reason; they’re supposed to LEAD the market.  If you start seeing high-growth stocks and hot names lag the indices, you’ll know the market is headed for a slowdown.

2. Distribution Days are few and far between.
I’m constantly discussing Distribution Days and Accumulation Days in my newsletter, but to those who are unfamiliar with this concept, a Distribution Day occurs when the market declines on increased volume.  In a healthy market, Distribution Days are rare occurrences – one or two every couple weeks.  When Distribution Days start showing up more often, especially in bunches, it means the market is in trouble.

3. The market regularly opens in the red and works its way green.
In a bull market, new or inexperienced traders often get frustrated by the opens.  The market opens in the red and traders freak out, thinking this may be the end of the rally, time to cash out.  However, as the day goes on, stocks climb higher and end up finishing positive.  This is classic bull-market behavior and it drives newbies crazy.

4. The market ignores bad news.
In a bull market, doomsday headlines get completely ignored.  Such headlines may cause a negative open, but the big money uses each bad-news-fueled dip to buy more stock.  On the opposite side, during a bear market, even seemingly great news gets ignored and the market continues to drop.

5. Leading stocks ignore bad news.
Just like the general market, leading growth stocks ignore bad news in a strong Uptrend.  Even a disappointing earnings report may lead to an initial drop in price, but the stock will be back on track and racing to new highs just a week or two after the news was reported.

6. Leading stocks move up on INCREASED volume and pull back on DECREASED volume.
Just as the general market’s Distribution Days are few and far between in a bull market, the same is true for leading stocks.  Yes, leading stocks will pull back and they may even do so for a couple weeks at a time, but these pullbacks will occur on much weaker volume compared to when the stocks are moving higher.

7. Even subpar stocks go on big runs.
In a bull market, even stocks with so-so earnings – or even negative earnings – will suddenly surge higher, sometimes for weeks at a time.  These runs are usually short-lived, but they last just long enough to make headlines and suck in novice traders.  While a Darvas/momentum-based trader doesn’t want to buy into these subpar stocks (we should instead be focused only on the leaders), we do like to see weak stocks surge here and there because it tells us the market is healthy.  It tells us that investors want so badly to be invested in this market that they’re even willing to buy subpar stocks.

8. The market, and individual stocks, easily blast through expected resistance levels.
The most obvious resistance levels include things like new 52-week high marks and key “rounded numbers,” such as $100 for a stock or 3000 for the NASDAQ.  These are the types of resistance levels that everyone sees in advance and everyone talks about.  In fact, everyone expects to see stocks at least pause at these levels.  In a bull market, stocks surprise everyone by blasting through these levels quickly and with little resistance.  Stalling at these levels doesn’t necessarily mean that a bull market has ended, but jumping through these levels as if they weren’t even there is the sign of a very strong market.

9.  You see clear Uptrends on weekly charts.
It’s not hard to find short-term Uptrends on a daily chart.  When you can identify Uptrends on a weekly chart, you know the market is especially healthy.

10. Bases on leading stocks look better.
In a bull market, the bases formed by leading stocks will look much more like the classic chart patterns you’ve studied in textbooks.  They’re less sloppy and much more traditional-looking.  When you start to see bases form that look less than ideal and more erratic, you’ll know the bull market is in trouble.


Commit these 10 signs of a bull market to memory.  If most of these signs are being upheld, you’ll know the market is safely moving upwards.  If you see more of these signals being violated, it’s time to start raising cash, locking in profits, and preparing yourself for a Downtrend. When the exact opposite of the 10 points listed above is occurring, it tells you were in a strong Downtrend.


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