Market direction is the most critical characteristic to consider when investing. Almost all the best stocks over the past five decades have made their upward moves when the overall market was strong. And historically, three out of four stocks have followed the general market trend - up as well as down. So it's critical to understand exactly what the market is doing by watching it every day. Accurately gauging the market is not a matter of luck or "Monday morning quarterbacking." There are clear telltale indicators that can help you identify market tops and bottoms.

Winning Characteristics

• Bear markets are normal and necessary and serve to clean up prior excesses. They also allow the market to create a whole new set of chart bases and leaders for the next bull market. It's important to not get discouraged or lose confidence; otherwise, you'll miss the next bull market.
• Bear markets create fear, uncertainty and a loss of confidence. When stocks hit bottom and turn up to begin the next bull market - loaded with opportunities - most investors simply don't believe it.
• New big winners emerge during the first 10 to 15 weeks of a new bull market. It's important to identify market turns early to capitalize on these great opportunities.
• The market indexes signal a market bottom. Look for the first attempt at a rally. If the rally follows through anywhere from fourth to tenth day of a rally (preferably by the seventh day), it is an indication of a new uptrend. For a valid follow through to occur, look for an increase in total market volume from the previous trading day and substantial price advances for the day - at least 2% in either the Dow. S&P 500 or Nasdaq Composite.
• At major market turns, you may see market indexes moving in different directions. The Dow, for instance, may be making new highs while the S&P 500 does not. It's also important to note if an index is advancing or declining at a much greater rate than another. For example, if the Dow rises 3% one day as the S&P 500 (the broader index) rises only 1%, it indicates the rally is not as broad or strong as it may appear. This is why it's helpful to study market indexes in tandem, to more easily spot confirmations or divergences at key turning points.
• Historically, market tops occur after the major market averages move into new high ground and show several days of large and increased volume with either poor price progress or actual declines in the averages.
• Few market predictions ever materialize. That's why you shouldn't listen to any personal opinions about the market. Instead study the day-to-day price and volume changes in the leading indices. The goal is not to predict the market into the distant future but rather understand its exact condition at the time. Is it in a confirmed uptrend or downtrend, and is it acting in a normal or abnormal manner?
• It's of no value to make a worthwhile gain during several years of a bull (up) cycle and then give it all back during the following bear (down) cycle. It's better to get out of the elevator on one of the floors on the way up than to ride it all the way back down.

How to Determine the General Market Direction

• The Big Picture provides a clear analysis of what the market is doing. Just as important, you'll learn what the market isn't doing. This daily column includes the "Market Pulse," a table summarizing the major action in the indexes and leading stocks. IBD's Big Picture pointed out distress signals in March 2000 when distribution heralded the end of a great bull phase.
• IBD's General Market & Sectors page should be checked every day to evaluate the market's health. The three key indices (S&P 500, S&P 600 and Nasdaq Composite) are stacked, one on top of the other, to help you spot confirmation or divergences in action at key turning points. A brief column next to the charts analyzes significant action, using numbered bullets to help readers understand what the charts are showing.
• The Markets, accessible from the homepage of investors.com, updates index prices and charts throughout the day.
• During attempted rallies in a bear market, the advance/decline line (produced by taking all NYSE stocks that rise in price for the day and subtracting those that fall) can be telltale, particularly when this line shows no ability to rebound when the indices try to rally.
• The General Market & Sectors page also shows several valuable psychological market indicators. The percentage of investment advisers who are bullish or bearish and the ratio of put volume to call volume have historically been solid indicators. These contrarian indicators can be valuable when examined in conjunction with the major market indexes.