We have to basically get down to what the stock market really is. The stock market is simply an auction - an auction of buyers and sellers. There's nothing magical about the stock market, it's like any other market. Buyers and sellers see "value" in stocks and they buy and sell those stocks according to their value beliefs.
Think of any open market and you'll plainly see this. For example - Ebay. You might be hunting for a particular item on Ebay and let's say you found it - but you are only willing to spend a certain dollar amount for it (i.e. your "value" on it). If the auction goes higher than what you are willing to spend (i.e. it's "value" to you) then you won't buy the item. However, someone else may have a higher value in mind to them and they will purchase the item at a higher price.
Stocks are the same way. Different traders (buyers and sellers) have different values of what that stock is worth that they are trading. If the value gets too low then the buyers will come in and buy it - they figure "Hey, this stuff is on sale and I'm buying tons of it". (This is similar to what Warren Buffet does). If the value gets too high, then the sellers come in and sell it - they figure "Hey this stock is just too hot and I'm going to sell and make a profit before the bubble bursts on this thing."
From now on, try to look at every chart with this in mind. Think of the price action in terms of buyers and sellers. When you get price swings then you know that there's quite a bit of buyers or sellers thinking the same thing.
Let's look at a few charts. This first chart is an uptrend - uptrends are bullish because the buyers keep on buying the stock at higher and higher prices - why??? Because they think that at the price they buy the stock (no matter what price that may be) that the true "value" is still higher than what the bought the stock for. Therefore the stock's price just keeps going up.
Here's a downtrend - which is bearish because the sellers keep on selling the stock at lower and lower prices - why??? Because they think that at the price they are currently selling the stock (no matter what that price may be) that the true "value" is still lower than what they sold the stock for. They don't want to have any of that stock because maybe the bottom will fall out and they will miss their opportunity to get rid of the stock before it loses any more value (and thus their profits). Therefore, the price of the stock just keeps going down.
Here's a sideways trend. This is where the sellers and buyers are basically neutral. The buyers buy when the stock gets down to a certain price, and the sellers sell when the stock gets up to a certain price. Therefore, the price just goes up and down in roughly the same price range. Neither party is stronger than the other - unlike bullish trends where the buyers keep buying higher and higher, and bearish trends where sellers keep selling lower and lower.
So, keep this concept in your mind - the stock market is simply a place where people buy and sell stocks. There are buyers who buy when the price seems like a good deal, and there are sellers who sell when the price seems like it's just too high.
More to come...
