Top-Down Analysis

The stock market is made up of over 20,000 publicly traded companies. Navigating through this large number of stocks can seem overwhelming just because there is some much information to take in. One simple approach to finding your next trade is called the “top-down” analysis. You begin by looking at the overall market by using technical analysis. What you are looking for is momentum or direction. The market is divided into 10 different sectors. Using these sectors will help you identify the industry group a specific stock is trading in. Find the sector that is the strongest and then drill down into that sector to find the strongest stock. As you practice this approach, you should get better over time, and with the help of technology, you should be able to complete this analysis in only a few minutes. This will save you time and energy and should get you to your next trade faster. This approach has an additional benefit; If you find yourself in a bullish or bearish market, meaning the market is climbing or falling in a direction, you should also find the sector with this same behavior, as well the stock with this same behavior. This is called “trading the trend.” This theory helps in timing the overall market, sector, and stock direction, creating directional alignment with or potential trade. It is not a bad strategy to simply follow the current momentum! This approach makes perfect sense when you are looking to apply a simple strategy, which should answer the question, “What stock should I buy?”