Markets are reaching all-time highs. Nifty moved beyond 18,000, Sensex surpassed 60,000 and sev-
eral stocks have given multifold returns over the last few months. But a year and a half ago, D-Street saw a blood bath and Nifty was at around 7,500. From that scenario, it has turned around to delivering
almost 150% returns in just 18 months. After the deep correction, the market has offered several maukas (opportunities) and many new investors have embarked on their equity market journey. How-
ever, new and old investors alike were anticipating a fall and thus missed the mauka of a bull run.
The important point here is to learn when to enter the market, which stock to buy, when to buy it, and
when to sell. Many new investors read investment tomes and study investment strategies, dreaming
of hitting it huge in the markets. But as Jeetubhaiya, a popular character in the web series Kota Factory
says, “aim and not just dream.” One needs to learn and then act on that learning to grab a mauka.
Source: Google Images
How to start and identify the mauka?
Want to learn about fish? Sit in front of a fishbowl and watch the fish
William O’Neil would quote the example of a Harvard professor who asked his students for a special
report on fish. The students went to the library, read books on fish, and then wrote their expositions.
After they turned in their papers, they were shocked when the professor tore up the papers and
trashed them. When they asked him what was wrong with the reports, the professor said, “If you
want to learn anything about fish, sit in front of a fishbowl and look at fish.” He then made his students
sit and watch fish for hours. They rewrote their assignments based solely on observation and by
studying the object itself.
The daily Nifty average represents an average of fifty large, basic industry stocks in India. It is one of
the objects an investor should observe and study carefully. The difficult-to-recognize but meaningful
changes in the behavior of market averages at important turning points are the best indicators of the
condition of the overall market.
Source: Google Images The Two Most Important Observations: Identifying the Market Top and Bottom
How to Spot Stock Market Tops
We all are aware of the importance of market status in determining an investor’s stance in the-
CANSLIM style. It not only helps the investor realize gains by being aggressive when risk is minimal, but also protects them from unwarranted market risks.
When the market is in a Confirmed Uptrend, it is the best time to make the most of one’s gains. This
is when most breakouts are successful, and hence an investor carefully following the pattern of their
stocks makes big gains. But how can one pre-empt a probable weakness in the market so as to lock-in gains and play defensive with little or no exposure? A distribution day can provide a systematic, credi-
ble approach to achieve this.
What is a Distribution Day?
A distribution day is when a market representative index (for example, Nifty50) loses more than 0.2%
in a day, with volume higher than that in the previous session. When a distribution day comes around,
it implies big institutional investors are exiting or reducing positions in the market. Institutional activity
is what moves any market, especially in India, where retail participation is small. Though a distribution day implies that institutions are liquidating positions, it loses its impact eventually after 25 trading sessions.
How Does the Distribution Day Help Sense Market Weakness?
An investor should keep count of all valid distribution days during a Confirmed Uptrend. Successive
distribution days imply a weakening market. But what count of distribution days would be enough to
say the market is under pressure? A count of 2–3 is benign and usually normal in a Confirmed
Uptrend. However, if the distribution day count rises to 5–6, one should prepare to trim positions in the
William O’Neil’s book How To Make Money In Stocks says “After four or five days of definite distribu-
tion over any span of four or five weeks, the general market will almost always turn down.” When this happens, an investor should carefully assess each stock in their portfolio and reduce their exposure
accordingly. In some cases, it would be wise to exit positions completely. Market rallies do not last
forever. They all end at some point. This usually happens when the market is smacked with a heavy
load of distribution days. Don’t wait for the market to fall. Apply O’Neil’s rules to identify the market top.
Identifying the Market Bottom
When markets come under pressure, a strict sell-rule is what can protect the investor from emotional
and financial distress. Often, when the market is in a correction, three out of four stocks follow the
market direction. Investors often believe they are right in their research and tend to cling to a stock,
even if the markets turn the tide. Selling is the key factor that sets apart a successful investor. If a
sell-rule is in place, it provides a clear framework to prevent biases and emotions from clouding one’s
investing rationale. An investor simply cannot afford to fall in love with a stock as it could turn out to
be an extremely expensive affair..
After a correction in the markets and once they cool off, a rally attempt begins, and the index trades
above the recent bottom for at least three consecutive sessions. A follow-through day is a solid up
session, generally registering a 1.5% or higher gain, with volume being higher than on the previous
day. A follow-through session officially opens the buying season for leading stocks. Leaders often
confirm the rally by breaking out of bases near the follow-through day.
What do you think? Please email us any questions or comments.Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.