Market is always right. So you should make sure that you are on the same page with the market direction. This post will help you to identify trigger points and make appropriate actions accordingly.
You can be right on every other factor we have discussed. But if you are wrong about the market direction, you will lose money no matter how good your stock selection is. This problem we faced a lot. Believe me, recognizing the market top or bottom is the most complicated ball game to understand. It is the key investing skill which can make you an ace investor.
So we need to have a reliable method to determine market directions. The best way to determine the direction is to follow and understand the market every day. If you do it correctly, you can’t be far off the track.
Now the question comes what we have to watch in the market.
We have to monitor the correlation of volume and price movement of the market. So the correlation we are discussing here is difference in percent change in volume and percentage change in price (or points if we are considering market index).
Confused. Let me help.
We have to check the correlation in four ways :
- Volume increase and increase of points in Sensex or Nifty
- Volume increase and decrease of points in Sensex or Nifty
- Volume decrease and increase of points in Sensex or Nifty
- Volume decrease and decrease of points in Sensex or Nifty
Hope this help. Now we will check how these scenarios fit in different situations.
Sign of market near the top:
- If the total volume show increase over the preceding day’s volume, but the market shows less upward movement than previous days. Is an early sign that the market is going to change the direction. If you wait until the market peak, then you are already late
- After the general market Response, I would say the second important indicator to observe is how leading stocks react to it.
- Another sure sign of a bear market coming up is when the original bull market leaders falter and lower quality stocks begin to move up.
- In the past it is marked as the beginning of the bear market and recessions if interest rates has been increased for three times in succession and is considered as the sign of end of bear market when the interest rates are lowered.
You should be quick to react. As if you wait until it becomes obvious to most people, it is definitely going to cost you more.
How to spot market bottoms:
As market bottoms are the best time to invest, skill to spot market bottom is crucial for your success in stocks.
- First observation you have to make is when market has already fallen. After a few days of hitting previous lows on nominally increased volume, you will get 2-3 days of increased volume without further downside progress. This is the point in time when market is ready for an upturn.
- When the market attempt short-term rally after the market bottom. You should follow through for at least 8 to 10 sessions of recovery. Why? Because first few attempted recoveries can’t tell whether the market has really turned around.
- For the first few sessions, market volume should increase from the last session and more importantly at least 1% price increase or Sensex and nifty points increase for every session.
The market can level any pride or excessive egos down to size. So be intelligent and objective to recognize what the market is telling you rather than try to prove you are right.
Remember! The market is always right.
Also, Near bear market bottoms, a great majority of advisory sources will be bearish and near market tops, same sources would be bullish.
In short “The majority is always wrong when they need to be right”.
Gold Rush in First Two Years:
Real big money is made in the first 2-3 years of a new bull market. You must recognize this time period as soon as possible. As it is crucial to fully capitalize that golden opportunity.
So stay focused, stay informed
Happy investing journey to you…
Experience of 8 years in stock investment. I learned everything by making a lot of mistakes and losing a good amount of money, I am here to make sure you don’t lose on either: Hope or Money.