Science of Stock Price Action:
Scenario 1: Bull Market does not end abruptly all the time. Lots of times it ends after a long sideways trading action at the top.
Let me share Sun Pharma Story:
Sun Pharma was in a strong Bull market between 2009 and 2014. Here’s the weekly chart
Source: Chartalert.com
When a stock rallies 5x-10x over few years: then the stock is bound to undergo some time correction i.e. it starts trading sideways and let the fundamentals and moving average catch-up with the stock. That’s what happened with Sun Pharma stock over last two years:
Source: Chartalert.com
As you can see in the chart above – Sun Pharma stock for two years traded sideways with a base at 720. Also, in the two years – 200-week moving average moved up and converged with stock price action. This triggered a HOPE that stock is Deep Value Buy now (200 week ma) and ready to run again after two years of time correction. But all good things come to an end – instead of rallying – stocks can break down too and when they do that – one should get worried. It’s better to abandon the stock than pray.
Source: Chartalert.com
Sun Pharma stock broke down with a large candle below horizontal support line of 720 as well as 200 week moving average. It then pulled back to retest previous support of 720/200 week moving average as resistance and then sold off sharply. The stock which once used to be BUY ON DIPS now seems to be on a downward journey.
Scenario 2: When a strong Bull market after holding long-term moving average breaks down – then a bull market can end with lots of pain. Here’s example of Chinese market
There is no point HOPING when strong Bull market cracks below 200 dma
Source: Chartalert.com
As you can see in the chart above: Chinese Shanghai Composite index tried its best to hold 200-day moving average but then once it cracked – it never recovered above it.
Below 200-day moving averages – it is the power of gravity that is at work and it keeps pulling the market down.
That’s why we say: in Bear market – when stocks are below 200-day day moving average – Sell the rally works. Also, no Low is the Low because market keeps making new lows. That’s why let the market say it’s done with downside before one starts hunting for value..
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers