The Ultimate Peak and The Ultimate Dip: Fear of Selling

The ultimate peak and the ultimate dip are something that one expects to trigger. This is next to impossible in a freely operated market since the price results from buy and sell activities guided by public sentiment towards market prospects.

The random walk theory by Louise Bachelier explains that the price movement is similar to the one returning home after having some peg. Taking positions whether the participant's case is either long or short is all with the expectation that the market is about to rise once you buy and the market is about to fall once you sell.

Various tools of technical analysis that are based on past trends suggested by price volume actions often give the base for timing the position but they are just the predictive tools with the belief that history repeats. They are the sets of disciplines that help traders to follow. And as a result, when mass follows on the same principle the market will somehow react accordingly.

The moving average is such a powerful indicator that often captures the moving sentiment of market participants. This is why there will not be a bullish indicator with those stocks at all the time that had hit the highest in the previous bull. We can relate this with one of the manufacturing stocks that had raised almost 6 times in the previous bull and concerning that past data we don’t get bullish indicators for that particular stock at the moment.

Let us clarify the moving average with the following example:

Stock XYZ:

• The 50-day SMA is currently at Rs.100.
• The 200-day SMA is at Rs. 95.

If Stock XYZ’s price starts rising and the 50-day SMA crosses above the 200-day SMA at $105, this could be interpreted as a “Golden Cross,” suggesting an uptrend. Traders might buy the stock in anticipation of continued growth. Conversely, if the 50-day SMA crosses below the 200-day SMA at $90, it could indicate a “Death Cross,” leading traders to sell the stock to avoid further losses. Here most of the beginners tend to average the cost or hold the sock since they expect to get pleased with reversal, but if you dare to sell at this point it is most likely that you can save major downfall and get a chance to re-take a long position at much lower price.

Using moving averages helps traders make decisions based on historical price data, smoothing out short-term fluctuations to focus on longer-term trends.

Nevertheless, once the market runs in a bullish momentum it is obvious that the booking of profit will eventually happen leading to some correction. So the question is how to time the buy-sell decision?

The main point here is you should never be afraid to sell. Selling at a profit or a minimal loss is always better than looking at the big profits and eventually selling at a big loss with the expectation that it has gone that far and will go again. Most people tend to hold or average their cost in the market where the overall sentiment of the market is somewhere directed to fall. If you are planning to hold the stock for the long run expecting a good dividend yield, just choose the one having a good dividend history followed by growth in core business revenue. Always check the ratio of earnings to Capital and this gives a brief overview of whether the stock is likely to give the same return regardless of capital appreciation. In most cases, the revenue growth is not captured by the capitalization thereby leading to a fall in return per capita.

Yet for beginners, the following three technical indicators along with volume analysis would be an indispensable tool to start with. Let us get to know about these most simply:

1. The Relative Strength Index (RSI)

To identify the trend reversal, Typically, an RSI above 70 is considered overbought, indicating that the stock may be overvalued and a price correction could be imminent. Conversely, an RSI below 30 is considered oversold, suggesting that the asset may be undervalued and a price increase might be forthcoming. the RSI ranges from 0 to 100.

Regarding divergence, RSI can also help spot divergences between the RSI and the price action, which can indicate potential reversals. For example, if the price makes a new high but the RSI does not, it may signal a bearish divergence and a potential price reversal. We shall keep in mind, that these indicators often come up with some limitations too.

2. The Moving Average Convergence Divergence (MACD)

Gerald Appel in the late 1970s discovered this indication that helps to identify changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
For example, imagine a stock that has been steadily climbing. The MACD Line is above the Signal Line, and the histogram is positive, suggesting strong bullish momentum. A trader might interpret this as a sign to hold or buy more shares.

Later, if the stock’s price starts to level off and the MACD Line crosses below the Signal Line, the histogram turns negative, signaling that the bullish momentum may be waning. This could be a signal to sell the stock.

3. The Bollinger Band (BB)

There are three bands the lower one, the middle one, and the upper one. Here we often look for the width of the band i.e. the distance between the upper and lower band, the wider the band higher the volatility and the narrower the band lower the volatility. When the price approaches the Upper Band, it may be considered overbought, while approaching the Lower Band might signal oversold conditions. However, prices can move outside the bands during strong trends. Bollinger Bands helps traders understand volatility and potential market reversals or continuations.

A simple trick for immediate trading decisions is to observe the Last Traded Price (LTP). When you are in front of the TMS screen, check the LTP whether it is on the seller’s price or the buyer’s one. When most of the time LTP is on the Seller rate, the Buyers are active and the sentiment is for buying, and in the reverse case the sentiment is to offload at any price the buyer is offering. This is just a simple trick to identify the sentiment on the spot, but never forget to look after the volume for buy and sell along with the LTP. This is not the only base to make decisions but can be helpful for those who are blindfolded following the rumors. However, the market is unpredictable and the positions might change at any fraction of a second.

Article By: Bibek Panthee