“If you want to learn anything about fish, sit in front of a fishbowl and look at the fish. If you want to learn about the market, you must observe and study the major indexes carefully.” – William J. O’Neil, MarketSmith Founder
Is it necessary to understand the market direction before you invest? Some investors ignore the market direction, which is a crucial tool that can be used to time the market. The market direction can be thought of as a tide. “A rising tide lifts all boats” – so does the market. Our methodology, based on market research, has shown us that three out of four stocks follow the market direction.
So if you invest when the market is rising, at the least, you are ensuring that the probability works in your favour, with little chance that the stock you are investing in, is one out of four stocks that defy the market condition.
The market direction can be assessed for strength or weakness based on a few technical concepts such as a distribution day count, current index with respect to 50-day and 200-day moving averages, a follow-through day, overhead supply of the index, among others.
The distribution day mechanism is a key concept that identifies weak days (down days, supported by institutional selling) in the market. The distribution day count helps determine the status of the market, whether it is in an uptrend or a downtrend. A follow-through day helps determine a strong up day in the market, which could potentially signal the beginning of a Rally.
So how to read the Indian markets now?
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