Market Structure Indicators

Market Structure Indicators monitor the trend of various price indexes, market breadth, cycles, volume, and so on in order to evaluate the health of the prevailing trend.

The area of technical analysis also embracing market structure or the character of the market indicators. These indicators monitor the trend of various price indexes, market breadth, cycles, volume, and so on in order to evaluate the health of the prevailing trend.

Indicators that monitor the trend of a price include moving averages, peak-and-trough analysis, price patterns, and trend-lines. Such techniques can also be applied to the sentiment and flow-of-funds indicators discussed previously. This is because these indicators also move in trends. When the trend of psychology, as reflected in these series, reverses, prices are also likely to change direction.

Most of the time, price and internal measures, such as market breadth, momentum, and volume, rise and fall together, but toward the end of mar­ket movements, the paths of many of these indicators diverge from the price. Such divergences offer signs of technical deterioration during advances, and technical strength following declines. Through judicious observation of these signs of latent strength and weakness, technically-oriented investors are alerted to the possibility of a reversal in the trend of the market itself.

Since the technical approach is based on the theory that the price is a reflection of mass psychology, or the crowd in action, it attempts to forecast future price movements on the assumption that crowd psychology moves between panic, fear, and pessimism on one hand and confidence, excessive optimism, and greed on the other. As discussed here, the art of technical analysis is concerned with identifying these changes at an early phase, since these swings in emotion take time to accomplish. Studying these market trends enables technically oriented investors and traders to buy or sell with the degree of confidence in the principle that once a trend is set in motion, it will perpetuate itself.