How professionals predict stock market moves

For more than 130 years traders have been trying to find effective ways to predict the movement of the stock market. There are, literally, hundreds of different so-called "indicators" that professionals use to make educated guesses about how a given day's market action will play out. Some of the most active, largest trading institutions try to divine information from a list of premarket gainers or losers, stocks that move in one direction or another just before the opening bell. Other analysts hone in on general economic news like inflation rates, unemployment numbers and major corporate business news. There's no agreed-upon strategy for effectively predicting how the stock market will perform, but that hasn't stopped experts from writing lengthy books and treatises on their pet theories. Of the many market prediction systems, three of the most prevalent are:

Follow the "Smart Money"
Some well-known institutions annually invest hundreds of millions of dollars in the stock market. For larger trades, buying and selling action is usually a matter of public record. Even though the exact buyers can remain anonymous in most cases, it's pretty clear that if "someone" purchases 50,000 shares of a blue-chip stock at the opening bell, that "someone" is an institution. Some of the world's most famous stock traders, like Peter Lynch and other renowned analysts, have long argued that institutional money is a bad influence for the market but is nevertheless a good way to "read the tea leaves" about upcoming price action. A number of traders buy and sell stocks for their portfolio based solely on what the institutions are doing.

Crunch Economic Numbers
Every day, the U.S. and other governments release reams of economic data about jobs, housing starts, employment, inflation and other key components of the overall national financial health. Millions of traders, both individuals and professionals, parse this economic data in an attempt to predict how it will affect the day's, or week's or month's, stock market. When so-called key economic indicators like the inflation rate and unemployment rate point to generally stable price levels and a very high percentage of adults in the work force, traders tend to believe that stock prices will react favorably to the good news. For long-term traders who are always trying to get a handle on the "big trend," such economic data can indeed point the way forward.

Use Moving Averages
Instead of looking at economic statistics and observing the behavior of institutions, one breed of traders pays more attention to price charts for a particular company's stock. These so-called "chart traders" believe that the answers lie in the moving averages. While there are endless ways to use averages in stock analysis, one of the most common strategies examines and compares activity of the 50-day and 200-day moving averages of a stock's price. Of particular importance to these traders is when one of those lines crosses the other, either to the upside or to the downside. In general terms, when the 50-day moving average of the stock's price crosses above the 200-day moving average (forming a "golden cross," that's good news, and indicates that the stock is poised to rise in price.