Market Direction.
Is the Market Heading South?
Check out the NSE Nifty
and BSE Sensex charts on ICICIDirect every day. Observe the price and volume
changes, there may be some selling on a rising day. The key is that volumes may
increase on a day as the index closes lower or is range-bound. Studying the
general market averages is not the only tool. There are other indicators to
spot a topping market: A number of the market's leading stocks will show
individual selling signals. In a falling market start selling your worst
performing stocks first. If the market continues to do poorly, consider selling
more of your stocks. You may need to sell all your stocks if the market doesn't
turn around. If any stocks fall 8% below your purchase price, sell immediately.
However, if you have tremendous confidence on the company stick to your pick.
Is theMarket Turning Upwards?
After a prolonged
fall, the market will try to bounce back and try to rally from the low levels.
However, you can't tell on the first or second day if the rally is going to
last, so, as ICICI Direct’s Wise investor, you don't buy on the first or second
day of a rally. You can afford to wait for a second confirmation that the
market has really turned and a new uptrend or bull market has begun. A
follow-through will occur if the market rallies for the second time, showing
overwhelming strength by closing higher by one per cent with the volume higher
than the day's volume. A strong rebound usually occurs between the fourth and
seventh session of an attempted rally. Sometimes, it can be as late as the 10th
or 15th day, but this usually shows the turn is not as powerful. Some rallies
will fail even after a follow-through day. Confirmed rallies have a high
success rate, but those that fail usually do so within a few days of the
follow-through. Usually, the market turns lower on increasing volume within a
few days.
When the market begins a new rally, stocks from all sectors don't rush out of
the gates at the same time. The leading industry groups usually set the pace,
while laggards trail behind. After a while, the top sprinters may slow down and
pass the baton to other strong groups who lead the market still higher.
Investors improve their chances of success by homing in on these leading
groups. Investors should be wary of stocks that are far beyond their initial
base consolidated point/stage. After the market has corrected and then turns
around, stocks will begin shooting out of bases. Count that as a first-stage of
a breakout. Most investors are wary of jumping back into the market after a
correction. Plus, the stock hasn't done much lately; so many investors won't
even notice the breakout. But the fund managers would take buy positions at
this stage.
After a stock has run up 25 per cent or more from its pivot point, it may begin
to consolidate and form a second-stage base. A four-week or other brief pause
doesn't count. A stock should form a healthy base, usually at least seven weeks
before it qualifies. Also, when a stock consolidates after rising around 10 per
cent, it's forming a base on top of a base. Don't count that it as a second
stage.
When the stock breaks out of the second-stage base, a few more investors see
this as a powerful move. But the average investor doesn't spot it. By the time
the stock breaks out of the third-stage base, a lot of people see what's going
on and start jumping in.
When a stock looks obvious to the investment community, it's usually a bad
sign. The stock market tends to disappoint most investors. About 50-60% of
third-stage bases fail.
But some stocks keep going and eventually form a fourth-stage base. At this
point, everybody and their sisters know about this stock. The company's beaming
CEO shows up on the cover of business publications. But while thousands of
small investors rush into this "sure thing," the top mutual funds may quietly
trim or liquidate their holdings.
Most fourth-stage breakouts fail, though not necessarily right way. Some will
rise 10% or so before reversing. Fourth-stage failures usually undercut the
lows of their old bases.
But a stock can be reborn and begin a new four-base life cycle all over again.
All it takes is a sizable correction.
How Do You Define A Bear Market?
Typically, market
averages falling 15% to 20% or more.
