What is the best stock market analysis tool and settings to use?
It’s one of the questions I get most from beginner traders… And after answering hundreds of similar questions, I decided to put this short tutorial together so you can see which tools to use and which to avoid.
This is a list of the best stock market analysis tools for different market conditions…
So just keep in mind that the best tool for trending markets is probably the worst tool for choppy markets. And the best tool for choppy markets might be the worst tool for trending markets.
In other words, before you decide to use these tools, make sure you figure out if the market is trending or range-bound first.
The Best Stock Market Analysis Tools for Trending Markets: Relative Strength
Relative strength isn’t an indicator but rather a comparison between two stocks in the same industry group, oftentimes called “cousin” stocks.
When one stock is strongly trending, you compare the trend to other stocks in the same industry to see how strong their trend compares.
You’ll typically find one particular stock that outperforms all others in the industry and leads the sector.
This comparison tends to work well with ETFs because they represent a wider range of stocks than one individual company.
For those of you who need a quick refresher, an exchange-traded fund, or ETF, tracks an underlying index or basket of cousin stocks. They offer instant diversification by giving us ownership in a basket of companies versus just one.
In the example below, you’ll see how the SPDR S&P 500 ETF Trust (NYSEArca: SPY), which tracks the S&P 500, has outperformed the Nasdaq 100-tracking Invesco QQQ Trust Series 1 (Nasdaq: QQQ) in the past.
This suggests that the rally in this chart is broad-based and not focused or centered on the Information Technology sector.
The Best Stock Market Analysis Tools: Where to Find Different Sectors
Back when I started to trade in the 90s, the internet wasn’t available.
I had to go to the newsstand every night to get the next day’s Investor’s Business Daily newspaper, which would divide stocks into sectors and provide a weekly highlight of each industry.
I used to cut out the sections so I’d know which stocks were in each sector.
But times have changed and there are hundreds of places where you can now get sector breakdowns.
The best stock market analysis tools to start with are on Barchart.com or Yahoo Finance. The more specific you can break down the sectors and the stocks or ETFs, the easier it’ll be to choose which ones have the highest correlation.
You want to find stocks that are closely related so you can figure out which one is stronger or weaker.
Relative strength works best when markets are trending, so I’d start off by analyzing strength and weakness with simple relative strength visual analysis.
Look at the 52-Week High/Low
One of the other best stock market analysis tools many people often ignore is the 52-week high/low.
It’s a simple measure of stocks making one-year price highs and lows.
But this tool doesn’t promise much and doesn’t look as cool as some other advanced indicators.
However, I can assure you more professional traders analyze the 52-week high/low more than any other technical indicator.
When markets are range-bound and lack any significant trend, the 52-week high/low won’t be of much use.
You’ll typically see a handful of stocks making highs and lows each day…
However, when markets begin trending, the numbers begin shifting quickly one way or another.
Once a trend begins, the ratio will show a strong bias in one direction and as the trend continues, the ratio will get stronger and stronger.
By monitoring this indicator on a daily basis, you’ll start to develop a feel for market momentum and start noticing patterns when trends are beginning or coming to an end.
Apply the 52-Week High/Low to Individual Sectors
Another way I use this tool is to analyze individual sectors to see how many stocks in that sector are making one-year highs or lows.
If there’s a specific sector trending strongly, I’ll typically see how many stocks are breaking out of the 52-week high and low price.
This helps me determine the type of potential the stock has.
Things to Keep in Mind
Some of the best stock market analysis tools aren’t actual indicators derived from mathematical formulas.
If we use the actual price to help determine the market for a stock, it’s like looking at market action without any filters.
Most technical indicators are filters that distort what happens to actual price to some degree.
Using relative strength to determine sector and individual stock strength can provide valuable clues to future performance.
The 52-week high/low ratio is one of the best ways to analyze cumulative market strength and weakness, as well as individual sectors and stocks. If you monitor this indicator on a daily basis for a few months, you should start to develop a “natural” feel for market ups and downs.
For more on this topic, please go to: How to Identify High-Probability Breakout Stocks and The Ultimate Trader’s Guide to Technical Analysis.
And if you haven’t done so already, subscribe to our YouTube channel so you can be notified as soon as we make our next post, and see what trade opportunities we’re paying close attention to!
All the best,
Senior Strategist, WealthPress