A. The stock that keeps making new lows and keeps going down or
B. The stock that keeps going higher.
Obviously, the stock that keeps making new lows. But that’s not the weird part. People are more comfortable buying that risky stock rather than investing in a stock that keeps making new high.
This happens because everybody has a belief system that stock that keeps making new lows will eventually move higher and stock that keeps making new highs will eventually head lower. This is the real problem. That may or may not happen but it wipes one out of the system before doing that.
Chasing Lows generally leads to disappointment and frustration because stocks that make new lows continue to make new lows. How do you know which is the lowest low?
Source: Chartalert.com
A stock that keeps making new lows is a risky stock and Avoid. Also, a stock that breaks down after being bullish is also a risky play and one should never hold such stock purely on HOPE.
There is a big difference between BUYING THE DIPS and Buy at Low point. Buying the dips is a process where traders and investors chase assets on declines when they are in a firm uptrend. Buying at Low price thinking that stock cannot fall further is totally different.
Let me share one illustration: Idea
Source: Chartalert.com
Idea stock was a buy on dips stock as long as it bounced from 125 but once it broke down in January 2016 below 125 – the stock became Avoid or Sell on rally. Just see why it pays to avoid a stock that has broken down or in a downtrend because you never know how low a stock can go. There is nothing called “Buy at the Low point”
Never ignore a disruptive trend change like Large Candle Selling
Lots of times you hear: the stock has sold off big time and it’s a great time to buy. Well, not necessary. When a stock sells off with a large candle, it’s generally the start of a big decline. Here’s Dr Reddy stock chart
Source: Chartalert.com
Dr Reddy stock sold off big time in Nov 2015 and now 13 months later – the stock has gone nowhere. The lesson is very clear: Never ignore large candle selling because it results in follow through selling.
Summing up
There is nothing risky than buying stock or asset in a downtrend. One should avoid such stocks at all cost. When stocks are declining, the best thing is to let them run its course. There is no point fighting and chasing the low point. Buying at the lowest point is the worst idea people carry in financial markets. One should always focus on trend. This is the most important lesson in financial market
The Concept of risk – Never buy a stock which the market hates.
The Financial Market is a crazy place. When it loves a stock, it can take it to moon but when it starts hating it – it can take it down to Hell. Just look at how the market has punished Just Dial stock post breakdown.
Source: Chartalert.com
Here’s the simple definition of risky stock – A stock that is making new lows and has broken down or is in the downtrend. In simple words – a stock that market hates.
Risk comes in two flavors: “shallow risk” a loss of real capital that recovers relatively quickly, say within several years; and “deep risk,” a permanent loss of real capital.” – William Bernstein
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