What Is The Single Most Important Reason A Stock Moves Higher?

wallmann · #1 (**permalink**) 10-04-06, 06:14 PM

Interestingly the types of answers you get would vary widely, from a great news release to more buying than selling. Although there are those who will debate the issue, for the most part a stock moves higher when buying volume exceeds selling volume. The old law of supply and demand comes into play. Basically, if you own a stock and don't really want to sell it, what would get it out of your hands? A higher selling price, right? Right. So, if we exclude market maker games and dirty tricks, the bottom line is that a stock will gain in price when more people want the stock, than want to sell it.

But you will find the "overall market tone" is a much more accurate measure of whether a stock will go up or down on any
particular day. For instance, take a look at a stock with a really great chart. Starting from the bottom left side of the chart, the stock moves up and to the right corner at a 45 degree angle right? Right, but it isn't a perfectly straight line is it? No, along the way, daily pull backs, stall outs, and one day dips are seen all over the place. So, here we have a stock that for lack of a better term is "in demand", and yet there were definitely days when profit taking hit, volume sagged, or it simply dipped on the day.

So, what is the point, you may be wondering? My point is this, "overall market tone" (feeling positive or negative) and individual sector strength is what will determine daily movements even though the overall movement for the long term is to the upside. With that thinking in mind try this one on and see how it fits: The ACME company is making money, it's growing earnings and they have made good statements about the future. A couple analysts have upgraded it and it looks good for a nice steady move higher. Well, chances are that indeed the stock is going to move higher and over the course of a number of months, it could even double its share price. But what will happen to that stock tomorrow if we wake up and the futures are down 85 points and when the opening bell rings, the market is in the toilet? We suggest ACME is going to take a hit for the day! Likewise if ACME is a "chip company" and the chip sector is down on news that DRAM prices have sagged, it probably doesn't matter that the entire market is in rally mode, ACME will probably be falling with its brothers in the chip sector.

So, when you are looking at a stock with an impressive chart and you want to get some of that stock, chances are a poor market day, or an "out of favor" sector day will give you the chance to pick up that stock a few dollars cheaper. The whole reason we are mentioning this is because "sector rotation" happens in a matter of days now. Years ago if the computer sector was in the dumps, it would be there for 3 months. Now, HWP, DELL, CPQ, can be out of favor one day and upgraded the next. That goes for chips, networkers, Internets, etc. Same with the overall market. So, buying into it on the poor market days and/or poor sector days is generally a good bet.

One of the hardest things to do is to buy a stock just minutes before the closing bell, after it has fallen a gazillion points on the day. In your mind you are thinking, "wow, this thing lost 15 points today, it may lose 15 more tomorrow", and you "could" be right. But if the stock has been moving up nicely and it dropped 15 points because the NASDAQ dropped 150 on the day, was it your stock's fault or the overall market's fault? Right, it was probably down simply because the market was down. Buying it at that depressed price was probably a good idea. When isn't it a good idea? If during a big one day fall like that the stock falls through some key support levels, or it released some type of horrible news. Either of those instances could see it fall a bunch more.

Yes, supply and demand causes individual stocks to move higher or lower in the long haul. But daily events are dominated by overall sector and market health. Remember this and it will help you enter trades at a much nicer price!

edited: Keep the Spam off the board

Yee Sian · #2 (**permalink**) 10-05-06, 02:28 AM

Perhaps what traders should be preoccupied with, is what they should do when a stock moves higher, and not figuring out why it is moving higher.

MDZ · #3 (**permalink**) 10-06-06, 08:34 PM

Hey Wallman, thank you for taking the time to put that up here. I agree with you on the fact that the markets will seem to overeact on certain things which will bring a stock down when it really shouldn't affect it. You seemed like you put a fair amount of time into that article, do you right somewhere else, or was this a first time for you?

Also, I saw that this was your first time to the forums, so I wanted to wecome you. Hope to see you around.

Mark

lytle · #4 (**permalink**) 10-10-06, 05:15 PM

Wallman,
Nice article. Well written.

Don

brett MM · #5 (**permalink**) 01-15-07, 12:06 PM

ACCUMULATION period.

Austryan · #6 (**permalink**) 01-15-07, 10:01 PM

Wallman, that was a great read.

I remember buying a stock (VIA a stock simulator) that had ended the day with Accumulation, and seeing it TANK the very next day. Before I abandoned ship I realized that my stocks particular industry had taking a huge beating that day.... so, the lesson I learned was: ? ? ? Even though you may pick a "sound" stock with good indicators, the market can rape it, I guess.