How to Read the Market Direction?

“You are better off staying on the sidelines in cash until a new bull market really starts,” – William J. O’Neil

Investors spend a disproportionate amount of time buying a stock, as compared to selling it. A good game plan for investing is akin to the war strategy used in the ‘Mahabharat,’ known as ‘Chakravyuh.’ The young Abhimanyu knew how to penetrate into the labyrinth formation, but ultimately met his death in the ‘Chakravyuh,’ because he did not have the knowledge of its exit strategy.

It is often said, “Only when the tide goes out, do you discover who’s been swimming naked.”

As the global markets come under pressure, a strict sell-rule is what can protect you from emotional and financial stress. Often, when the market is in a correction, three out of four stocks follow the market direction. Investors often believe they are right in their research and approach and cling on to a stock, even if the markets turn the tide. Selling is the key factor that determines a successful investor from others. If a sell-rule is in place, it provides a clear framework for avoiding biases and emotions to creep into your investing. With the Indian market in a correction, do not hesitate to sell away stocks that breach your sell rules. You simply cannot afford to have a love affair with a stock as it could become an extremely expensive affair.

Post a correction in the markets, a Rally Attempt begins after the markets cool off, and the index trades above the recent bottom for at least three consecutive sessions. A Follow-Through Day is a solid up session, generally a 1.5% or higher gain, with volume being higher than the previous day. A follow-through session officially opens the buying season for leading stocks. Leaders often second the Rally’s confirmation by breaking out of bases near the Follow-Through Day. A Distribution Day is a weak day in the market, when the index closes on higher volume by 0.2% or more. The number of distribution days in the market can be used to gauge the strength in the market

Most of the stocks continue to take on technical damage with many moving deeper into their respective bases and breaking below logical levels of support. It is advisable to continue to monitor quality ideas with rising relative strength lines and superior fundamentals that could be set up to buy when and if the market begins to stabilize. Watch closely if the Nifty holds its low of 8,555 for at least three days.


Watch our webinar on: How to Gauge the Market Condition Using O’ Neil Methodology

Read our last week’s article on: Investing Mistakes to Avoid in a Down Market

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.


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