How to Identify a Market Top

Jun 26, 2020

Apurva Sheth, Editor,Profit Hunter Pro

The recent correction in the market is something that I could see coming. It wasn't difficult to spot.

You see, successful trading is a mix of three things. Charting i.e. picking entries and exits, money management, and the third and most important of all and also often ignored, trading psychology.

It is often called 'behavioural finance' and it plays a crucial role in trading.

Today we are going to see how to club together, technicals or charting along with the emotional or behavioural aspect of trading.

Let's see how this could have helped to identify the recent correction.

Enjoy the video. Share your views in the comments. I love to hear from you.

Hi, I'm Apurva Sheth and I welcome you to this latest edition of Fast Profits Daily.

So friends, successful trading is a mix of three things; charting entries and exits, money management, and the third and the most important of all and often ignored, is trading psychology. It is often termed with different names, like emotions, behavioural finance and so on and so forth.

But that plays a crucial aspect in trading. So today we are going to see how one could have clubbed technicals or charting along with emotional expect or behavioural aspect into the markets right now and how this could have helped to identify that a correction is overdue.

So first we will look at the technical aspects. So now you can see on your screen I have the chart of Nifty. Now I am recording this video early morning on Thursday, and the SGX Nifty is indicating that the markets are likely to open down by about a 100 points.

So now what do we have on this screen over here? So this is a daily chart of the Nifty. Now, the red line that you can see out here is the 200 DMA. A lot of traders respect the 200 DMA a lot. Now the simple rule of 200 DMA is that if the markets are above it, then it is considered as the markets are in a long term up trend and if it's below it, then it's considered in a down trend.

Now 200 DMA acts as a support as well as resistance. So out here you can see in the month of February, the markets dropped and pulled back after touching the 200 day exponential moving average and out here, the markets were again nearing 200 day exponential moving average.

Now, apart from this, the markets were also trading near an important Fibonacci retracement resistance of 61.8 percent in the level for Nifty comes at around 10,437. Now I have done a video on Fibonacci retracement where I have explained why this is an important resistance. I did this last week and it was a quite clear that the market would face resistance from these levels.

So this is a second point that the markets were trading close to a important retracement resistance and along with this the markets are also trading at a rising trend line resistance levels. So, as you can see out there, I have drawn a trend line and it has touched three points correctly and out here it was again getting close to this trend line resistance.

So these are the things that were there on the Indian markets. Now, apart from this, the US markets were also close to a important retracement resistance of 78.6%. So if you can see out here, this is our daily chart of Dow Jones Index and it had formed an island reversal. What is an island reversal? I have done a video on that as well, and I'll be dropping the links of these videos in the transcript so you can go and watch it. So from there it was also closer to the 78.6% replacement level. So the US markets were also indicating that there could be a possibility of a downtrend.

So, apart from this, the broader markets have participated strongly the recent few weeks. Out of the 365 non F&O stocks that are part of the CNX 500 universe, only 18 stocks ended in negative territory over a 20 day period. So if you have bought any of these stocks over the last 20 days, then chances are that you may have made a profit and a lot of traders have generated good profits and it had started becoming slightly easier for people to make money from the markets.

So whenever it becomes easier for traders to make money, they get greedy and generally go overboard with they are trading and that's when you need to be cautious. So that's how the emotional aspect comes into picture. Now let's take a closer look at the emotional aspect of the market's cycle.

So market's start from a point of optimism, go towards excitement and as and when people start making more money, they get the thrill of trading and then it generally leads to euphoria and that is a point of maximum risk, which then leads to denial, fear, depression and corrections. So currently what we had seen is a mix of this entire cycle of market emotions packed into just 3 to 6 months.

So we started on a high note in the month of January, markets were almost euphoric. Then correction. The markets dropped first in the month of February, they bounced back and then there was a sharp fall and almost led into desperation and panic. We also saw capitulation in the month of March, when the index hit the lower circuit and bounced back but then again it fell down and then once the recovery started, we began to move higher.

So we were again in the optimism and excitement phase, and traders were again starting to get the thrill of trading. I've seen people are talking on WhatsApp groups. Family and friends who generally do not trade, started asking advice for trading and investment recommendations. So that's when one should get really cautious. These are the signs of euphoria or excitement, and that's when things start getting frothier and frothier.

I've also seen a lot of people talking about their recent traders and the kind of money they've made of the social media pages, which attracts people. So, all these signs were indicating that the markets were getting into the frothy territory and it's time to be cautious.

So now this could be a difficult thing to identify for common retail investors. So, you need to train your eye to identify such things. For me, a tweet from CNBC TV18 did the trick. Now CNBC tweeted this picture of where he said that today we are seeing, now if you notice out here, he said that today we are seeing the excitement, and many are feeling the thrill of trading.

Now, when people start feeling the thrill of trading and when it is confirmed by the head of a stock exchange, you need to know that it's time to be cautious in the markets. So that's how one can club both the trading or charting aspect, along with the emotional and psychological aspect to become a better trader. I hope that this video has added insights into how you can club both these aspects of trading or charting and emotions and psychology.

So that's all from me for today. Thanks a lot for watching this video. Please do like it, share it and subscribe to our YouTube channel.

Thanks a lot and have a nice day.

Stay safe and have a great weekend!

Warm regards,


Apurva Sheth
Senior Research Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

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