InvestorQ : How to draw the market trend and trade accordingly?
Archita Jajjoo made post

How to draw the market trend and trade accordingly?

3 years ago

The most basic trend you need to understand and decipher is the market level trend. A quick look at the Nifty or Sensex chart along with higher tops, higher bottoms, MACDs and other technical indicators will give you a quick idea of where the Nifty could be headed. Once the trend is deciphered, you need to remember one basic thing. Indices are not stocks and hence a buy-on-dip or a sell-on-rises strategy will work best based on the underlying trend that you identify. Remember, once you identify trend, don’t every try to contradict the trend rule.

There is a very important thematic trend. Themes are a set of companies that tend to benefit or lose out due to some key development in the market. For example, when the RBI cuts rates then all rate sensitives like housing finance companies, NBFCs, banks, real estate companies and automobile companies tend to benefit due to cheaper credit. On the other hand when rural incomes are likely to pick up then all sectors like FMCG, two-wheelers, white goods that can benefit from rural demand tend to do very well. When you are trading a trend, you need to be very clear that you have interpreted and deciphered the trend properly before trying to play it.

Sectoral trends or industry trends are a lot simpler. You can refer to the performance of the sectoral indices on the BSE and NSE and that will give you enough ammunition to decide which sectors that you must play and in what direction. Normally, there are trends within the sectors like private banks within banks; four wheelers within automobiles, steel makers within metals etc. Trends in the sectors are a lot more visible because you can see the stimulus. For example, pick up in Chinese demand for steel will lead to a turnaround in demand for steel stocks in India. This is applicable across the industry.

Stock specific trends are easy to spot and normally the impact can be gauged by higher volumes, new highs or new lows, institutional buying, analyst views etc. Such views can be helpful in identifying the trend for the short term as well as for the long term which means this intelligence can be used for trading and for investing. When it comes to stock specific trends, the market normally has a story to tell you and the onus is on you to decipher and play the story.

International trends also matter when you trade. When the IT stocks crashed in the US in 2000 or when realty stocks crashed in the US in 2008, the impact was felt across the world. These are relevant global trend that matter. Global trends are normally quite apparent and are limited to stocks that have strong global dependencies. The impact of stringent FDI regulations on pharma companies and the impact of Trump’s visa policies on the Indian IT industry are cases in point. There can be unrelated impacts too. When Volkswagen got embroiled in its diesel controversy in the US, it had its impact on diesel car makers in India as well as auto ancillary companies supplying components to auto companies globally.

Finally let us never forget the all important intraday trend in the stock. From a trader’s point of view there is all-important intraday trend. Interestingly, this is one area where you can attempt a contrarian approach with a specific logic. When a stock corrects too sharply or rises too sharply, you can spot a contrarian trend of these long positions unwinding or short positions covering, which will give an opportunity to play contrary. But such trades should eschew the overnight trend risk!