“Buy the rumor, sell the fact’ goes the maxim in the stock market. A Nifty rally that started in June 2024 on the expectation of an imminent Fed rate cut, and one that survived assassinations, pager and walkie-talkie explosions, and belligerent political rhetoric in West Asia to deliver 23% returns in a matter of 3 months appears to have come to an end just after the Fed announced a larger than expected rate cut. Since then, the correction in the last 10 days has wiped out all the gains made in the entire month of September and the price now stands right at the low of the previous month – a key support level.
For all the trading sessions but one in this month, the market opened higher and closed lower, signaling unrelenting selling pressure.
To be fair, the market is still in a higher high and higher low (HHHL) structure meaning the market is still trading up, it is precariously close to breaking the previous lower high made exactly a month ago at 24,748.50. The price has also settled below the 50 DMA, which is now offering a firm resistance. If this level is breached, and the price settles decisively below it, we could say that the HHHL structure is now broken and we are looking at volatile consolidation at best or a new lower high, lower low (LHLL) structure i.e. price trending down.
And there are good reasons to worry about such a deeper correction. Foreign investors, lured once again by China’s unprecedented economic stimulus are continuing to pull money out of India. It is expected that Q2 FY25 will see slowest earnings in 17 quarters (or first time since the pandemic hit in 2020), inevitably leading to analyst downgrades. The jobs and CPI data coming out of US only today indicating a weaker than expected US economy with still stubborn inflation. Throw in the mix Israel and Iran that are still threatening to light the Middle East on fire, knife-edge elections in the US and key states of Maharashtra and Jharkhand next month….
The bears patiently waiting on the sidelines for months must be itching to pounce.
$NIFTYBANK.NSE has attempted for the fourth time the 39600 low. The one major difference from the last three attempts is that the selling pressure is far more intense today. Will the index bounce off this support again tomorrow or will it head downward?
On one hand, the US markets seem to be turning around. The fears of SVB contagion have been contained for now. That might offer some tailwind for $NIFTYBANK.NSE .
On the other hand, looking at purely the price action, buyers don’t appear to be anywhere in the vicinity. If the support of 39600 breaks tomorrow, we could see a further slide to 38000 – 37500.
I will back myself to go short again tomorrow if there’s any sign of weakness.
Any of us who has lived for a few decades have seen ups and downs, good times and bad times.
If we reflect back on all those times we will realise that most of the wisdom that we’ve accumulated over the years has been accumulated during the bad times and from the unpleasant experiences. From failures and struggles. Those who use those experiences, failures and struggles as a source of learning have seen a much greater personal growth than those who squandered away those opportunities.
As with life, so with trading. I say this from my personal experience that every little growth I’ve had as a trader – either improving my trading psychology or fine tuning my trading strategy – has come during the stock market corrections.
The current market offers yet another opportunity to learn and grow. If you pay attention and try to learn during this time, you’ll make the most of the inevitable rally that’s around the corner. Don’t squander this opportunity.
Abhimanyu is a brave and tragic hero in the Hindu epic, the Mahabharata. He is the son of Arjuna and Subhadra, the half-sister of Lord Krishna.
As an unborn child in his mother’s womb, Abhimanyu learns the knowledge of entering the deadly and virtually impenetrable Chakravyuh – a circular battle formation – from Arjuna. The epic explains that he overheard Arjuna talking about this with his mother from the womb. Arjuna spoke about entering Chakravyuh and later Subhadra dozed to sleep. Arjuna stopped explaining Chakravyuh escape when he saw Subhadra slept while listening. As an effect, the baby Abhimanyu in womb didn’t get a chance to know of coming out of it.
Fast forward to the 13th day of the battle of Kurukshetra – the epic war between Pandavas and Kauravas as narrated in Mahabharata – the Kauravas challenge the Pandavas to break the Chakravyuh.
The Pandavas accept the challenge since they know that the knowledge of how to defeat such a formation is known to Krishna and Arjuna.
However, on that day, Krishna and Arjuna are dragged into fighting a war on another front with the Samsaptakas. Since the Pandavas have accepted the challenge already, they have no choice but to attempt to use young lad Abhimanyu, who has knowledge on how to break into the formation but none whatsoever regarding how to break out of it. To make sure that Abhimanyu does not get trapped in this endeavour, the remaining Pandava brothers decide that they and their allies will also break into the formation along with Abhimanyu and assist the boy in breaking out of it.
On the fateful day, Abhimanyu uses his skills to successfully break into the formation. The Pandava brothers and allies attempt to follow him inside the formation, but they are effectively cut off by Jayadratha. Despite finding himself alone inside the Chakravyuh and surrounded by the entire Kaurava army, Abhimanyu fights valiantly, even arrogantly, until all the Kauravas, ignoring the prevailing codes of war, fight him simultenously and kill him1.
The moral of the Abhimanyu story is to always plan your actions with an end in sight. And there is a lesson to be drawn from it in the business of investing and trading.
In my experience of speaking to many “retail” investors – regular guys like us – who invest in the stock market, one peculiar thing stood out to me. It is that when we buy a stock or any other traded security, we don’t have a clear plan of why, when and how to get out. And there are the same few reasons that are regularly cited:
Buying and holding a stock is when you create real wealth
Much like Abhimanyu the fetus heard only half the story of chakravyuh, most of the investors I spoke to have either read or heard this “buy-and-hold-to-create-real-wealth” statement from somewhere without questioning that claim or even better backtesting its logic. They just accepted that as gospel truth. And yet, the evidence2 suggests otherwise.
Now don’t get me wrong. I am not advocating for constant portfolio churn. I am not saying one should exit a trade or an investment after a specified time or profit target or simply out of boredom. But there has to be a rational, grounded and backtested exit plan for every trade and investment. It could be based in fundamental or technical analysis, it could be entirely stop loss rule-based. But having an exit plan is important. Without one, it is all too common to see people sitting on huge losses or giving away considerable gains.
Many of my stocks are too deep in red. I don’t want to lose all that money. It will recover at some point
How many of you reading this are sitting on stocks with 20%, 30%, 50%, even 70% losses? How many of you hold stocks that are at the same level or very close to where you bought them many years ago? Some friends have even said jokingly to me that their stocks have corrected so much that they’ve now become “long-term investors” in the company.
This goes further than buy and hold. It becomes buy and hope!
The problem is that we operate from the place of fear – the fear of booking losses or the fear of giving up notional profits if the prices go up after we exit the trade. And yet, losses are a reality not just in the business of investing but in life in general. Little do we realise that the deeper in loss we allow our positions to go, the harder our money has to work to get even to breakeven. The table below illustrates the point:
The deeper you’re in loss, the more difficult it is to recover from it
The more rational thing to do is to cut your losses short when you know that the investment you’ve made isn’t going in the direction you hoped. If you have an investment rationale or a trading plan, and if you follow it diligently, it’s impossible that you will always make losing trades. Even if you take small losses 60% of the time, the 40% of the time you get them right will more than make up for those losses.
I am good at buying but not very good at selling
This is either an extension of the earlier reason – I can’t sell a stock now that it is so deep in red / it has corrected so sharply from its high or it is a genuine issue about not having an exit plan. There’s nothing more to it than that.
It comes down to the individual level to determine which is it and work either on the psychology or the exit plan. Oftentimes, work is required on both fronts.
In conclusion
It is never wise to get into anything without having an exit plan – be it on battlefield, in trading or at extended family dinners.
It always pays to have planned out why, when and at what cost you’ll exit.
Cutting losses short and letting profits run is the best way to create wealth
Losses are an integral part of not only the business of investing but also life in general. Accepting those losses and moving on is always a healthier choice.
Caveat
In his seminal book ‘The art of thinking clearly’, Rolf Dobelli mentions ‘Confirmation bias’ as one of the major cognitive biases. I am very much mindful of my own confirmation bias in that I may have overlooked or even completely ignored evidence that supports never exiting an investment. That said, because I am fully aware of my own bias, I am always seeking information and evidence that challenges my own beliefs. I would be very grateful indeed if I am presented with evidence contrary to what I have presented.
In return, all I argue for and request of the reader is to have an open mind, recognise your own biases and do your own research / seek evidence that can challenge your own beliefs on this matter.
After spending a significant amount of time rangebound, Cummins is trying to break out of that range with a gap up open and huge volumes. It has also made a new higher high in the process. Will it sustain that break or plunge back into the range? I am betting on the upside.
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Ashish Deodhar 