Recently, the markets have been highly volatile. We have to be cautious as Nifty has breached its 50-DMA and distribution count has increased to three. The next level of support is at its 100-DMA (14,575), which is just 100 points below the Friday’s closing of 14,677. Historically, 100-DMA has been a good support for Nifty. If that level, is breached then further downside is expected.
What if the market continues to decline?
If the Nifty declines more than 0.2% on volume higher than the previous session, we would consider it as a distribution day. Accumulation of distribution days is tracked, if the count increases to four/five, we would downgrade the market status to an Uptrend Under Pressure.
The above picture explains our methodology in changing market direction. In a Confirmed Uptrend, our conviction toward the market is high and capital allocation would be maximum. In an Uptrend Under Pressure, we would start trimming our positions and book out most of our profits. Fresh initiations would be minimal, only highly rated stocks exhibiting strong price-volume action would be added to our model portfolio.
In a Downtrend, our conviction is the lowest. We would exit our model portfolio and stay in cash. Fresh positions will not be initiated in this status.
Related articles: How to identify market top distribution days give an idea?
How to invest in stock market using CANSLIM?