»Fast Profits Daily by Equitymaster

On This Day - 27 MARCH 2020
How to Identify a Market Rebound

Apurva Sheth, Editor,Profit Hunter Pro

The Indian stock market is up three days in a row.

From Monday's low, the Nifty has made a double digit gain in record time.

If you didn't participate in this rally, I understand. It's not easy to buy when everyone else is selling.

Is there a way to know when the market could reverse it's direction?

Yes, there is and in today's video, I will show you how.

Let's go...

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

The last time, I recorded a video from my home. It was very noisy. However, this time we're on, it's absolute silence.

You could hear the birds chirping all day long, and that's because PM Modi has announced a nationwide lock down until 15th of April.

Now, lockdowns are quite depressing, if you ask me. You cannot meet anyone. You cannot move out of your house and there is sad news all around you.

However, no good part is that you can breathe fresh air can be with your family, and there is an opportunity to learn anything that you want.

Now at fast profits daily, our intention is to teach the skills of trading and make you the best of the trader than you can be. So today I'd like to show you an indicator which I used to pick an important bottom in the US and European markets.

Now what is this Indicator? Let's check out the charts now.

Here I have the daily chart of Dow Jones Industrial average, which is the benchmark American index. The green line that you can see out here is the 200 day simple moving average. What is this 200 day simple moving average?

I'm sure most of you might have heard traders use this moving average to figure out the trend. So the 200 day moving average is nothing but average of the last 200 days' closing prices.

If the current market price is above this moving average, then you would say that the market is in a long term trend.

If the current market price is below this moving average, then you would say that market is in a down trend.

So as you can see out here, the markets, the American markets, were in an uptrend until the 26th of February, after which it broke below this moving average and went down.

Now this moving average can also be used to identify bottoms in indices as well as in stocks. Now, how did I do that?

So the relationship between the 200 day moving average and the price is like the relationship between a dog and a leash tied around its neck. The dog can move only as far as the length of the leash allows it to.

In this case, the prices and the 200 day moving average also have a similar relationship. The 200 day moving average acts as a leash and price action is the dog tied to it.

Price generally moves above and below the moving average, but it does not stretch far above and far below it, and whenever it does, there is a high chance that the price will revert to the mean, will move back to the moving average.

So here, in this case, so now let's come to the bottom panel. So here in the bottom most panel, I have plotted the percentage difference between the 200 day moving average and the last low price.

So as you can see out here, price is trading way below it's 200 day moving average. In fact, until last week, it was trading more than 30% below it's moving average.

Now this is an historical low. The last time the price stretched this far below the 200 day moving average was in 2008. So as you can see out here, the Dow Jones industrial average was trading almost 34% below it's 200 day moving average at the bottom of the crisis in March 2009.

It had hit the same levels two times earlier as well, in December 2008 and in October 2008 as well. This was an indication that it is a price extreme and generally prices do not drop in a straight line and whenever they do, chances of a pullback are much, much higher and the pullbacks are also sharper, which we have seen this time around.

So the now Dow Jones Industrial Average moved up by 11% in one day on Tuesday. On Wednesday it ended up by about 2 to 3%. So now that was a very sharp bounce back from the loss.

However, this does not mean that this is the final bottom. The bulls will make an attempt to pull back. However, they would also face selling pressure from the highs.

So there will be an attempt for pullbacks and there will also be selling pressure and eventually we will create a base from which there would be a new upside.

So this is how I used the 200 day moving average to identify a crucial turning point in the Dow Jones industrial average and in fact, in all the other American and European markets.

You could use the 200 day moving average in a similar fashion for stocks as well. So for that you need to identify at what level the stock is currently trading below it's 200 day moving average and what was the most extreme level that it had hit in the past?

If it's trading anywhere closer to the previous levels, and if the price action is also indicating that fall is coming to a halt, then there are chances that the stock would bounce back.

Now we are seeing many such stocks bounce back in the markets over the last couple of days. So you could identify some of these stocks and take a trade.

So that's all from me for today. I hope that you enjoyed watching this video. I hope that this video has added value to your trading. I hope that you would use the 200 DMA in the way I just showed you and identify profitable trading opportunities for you.

I'm also adding the link of the article, which I published where I used this 200 DMA to identify an important bottom in the US and European markets below this video so you can click that.

I'd also like to remind you that Vijay Bhambwani would be conducting an event on Monday at 5 PM. So there he will be talking about many other strategies and ways in which you could identify trading opportunities in the current market environment.

So don't miss it. So that's all from me for today.

Thanks a lot and have a nice day.

I'll be back next week with more on the Fast Profits Daily.

Vijay will be back on Monday.

Until then, stay safe and have a profitable trading day.

Warm regards,

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

PS: Join India's #1 trader, Vijay Bhambwani, at the Weekly Cash Summit to discover the most profitable strategy for this market. Register for FREE here...

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