MarketSmith India How to Handle Market in Downtrend

How to Handle Market in Downtrend

February 26 2022 | Reading Time: 5 Minutes
“The moral of the story is: never argue with the market. Your health and peace of mind are always more important than any stock.” - William O’Neil
 
To make money in the long term, you need to protect your profits in a downturn. A downturn in the major indexes tends to pull down most individual stocks with it. Therefore, it is risky to buy stocks during a correction. It is also critical to keep a close eye on any stocks you already own.
 
FAQs
 
What to Do?
 
  • Avoid new buys. In a market downturn, the odds of success are not in your favor. You would be better off waiting for the next uptrend to begin before purchasing anew.
 
  • Protect your profits and cut short losses.
 
  • Consider selling your weaker holdings. If you own stock that is selling off and you are sitting on a small loss or at breakeven, you may want to take defensive action and reduce your exposure. At the very least, follow the cardinal rule of selling – always sell if a stock drops 7–8% below what you paid for it (in a weak market, you may want to cut your losses sooner).
 
  • Keep a close watch on your stronger stocks. You do not have to sell all your stocks in a [correction]. If you have a decent gain in a stock bucking the market trend and showing strength and resilience despite the overall downturn, you can certainly hold on to it. But be ready to take defensive action on emerging signs of trouble. You could also sell a portion of your position. This way, you nail down some profits, but also maintain a position in the stock if it eventually continues to move upward.
 
  • Set a target sell price for any stock you still own. One of the key tenets of successful investing is to never let a good gain turn into a loss. So if you are holding a stock during a [correction], set a defensive sell price. For example, if you are up 20% in a particular position, maybe you would be willing to let that gain drop to 10%, but no more. If the stock drops to your target price, sell. Setting a sell price ahead of time helps keep your emotions at bay and protects your hard-earned gains.
 
  • Prepare to make money in the next uptrend by building your watch list. During a correction, many investors are discouraged and give up on the market altogether. Big mistake! Many leading stocks build bases during market downtrends, then break out and launch new moves right when a fresh uptrend begins. So if you want to catch big gains, it is essential that you prepare your watch list while the market is still down.
 
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Current Market Status
 
We changed the market to a Downtrend on February 24 as the [Nifty] breached its [correction] low (16,809) and made a new low of 16,203.
 
The market was changed to a Rally Attempt from a Downtrend on February 17 after Nifty managed to hold above the previous correction low (16,809) for three consecutive days. But on February 24, as that low was breached, we went back to a Downtrend.
 
With Nifty having breached its 50- and 200-DMA, it is better to stay on the sidelines than to take on undue risk.
 
Although it is tempting to buy stocks on pullbacks during a market [correction], we should wait for market conditions to improve and avoid catching a falling knife.
 
Nifty50 Chart February 24 (EOD)
 

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