For buyers; consider a share continuously moving down over a period of time and you find the fall in the price as a buying opportunity. To decide your entry price, support level is there to help you. Since the stock is unlikely to go below this level, you can opt to buy at this level without fearing any risk of further downfall and aiming to take an opportunity to buy.

For sellers; consider a share continuously moving up and your aim is to have maximum profit margin and take a profitable exit. Thus to decide upon an exit price, Resistance level is what you should look for. Since the stock is more likely to “bounce” off this level rather than breaking through it, you can sell your stock for better returns.

In generic terms, for a stock trading between support and resistance levels, the strategy of a trader should to buy a stock at support and sell at resistance. For traders involved in short selling short at resistance and then cover the short at support.

As a part of technical analysis there is no denying the fact that support and resistance can help you benchmark your decisions but it is very important not to assume that these levels will not breach at all.

It is likely that a declining stock breaches a support level and continues dropping until it finds another support level. This is called breakdown and usually occurs when number of Buyers willing to step in to buy exceeds the supply available from sellers willing to sell. On the similar note, a rising stock may also breach the resistance level and continue rising till it finds another resistance level.  This occurs when the supply available from sellers willing to sell is greater then the demand from buyers willing to step in to buy. This is as simple as the concept of “demand and supply”. But next time you make a buy/sell decision, do take few minutes to have a look at these levels to enjoy its crunch.

All the best…

Renuka Kinger

Market is said to be bearish when it keeps falling for a prolonged period of time. The common thought that creeps into our mind is about triggering event causing such a prolonged downfall. There can be many reasons like economic recession, political events like war and invasions, decrease in corporate profits, stocks being overvalued etc. ( Also see What is a Bull market and Bear market ? )

The question arises now what keeps it to remain bearish for such a long duration? Consider yourself stuck in a stampede struggling to save your life. You will make every effort to get out of it. Similar is the situation of an investor who speculates huge losses in bear market and wishes to avoid them. When market shows downtrend continuously, selling pressure continues and there are no potential buyers in the market. This creates panic amongst the investors who wish to make an exit by booking nominal profits if they find themselves lucky enough. This situation which leaves selling as the only option keeps the bearish market alive.

What does bear market has in store for you?

The only rule of finding hidden treasure in bear market is to be optimistic and observant of market movements while everyone is rushing out to seek shelter. The reason is simple as indicated in diagram below. There is always a cyclic trend wherein after a period of recession, market recovers and finally booms.

Think of a pendulum which has to come back to its original position and rest assured that bears will turn bullish. The only catch is how to decide what to sell from your current holding and what to buy for further gains.

While selling keep two points in view. First, don’t bother if you don’t book profit; make sure you are not into losses. Second, don’t sell because everyone is selling. To choose the ones to be sold, revisit your portfolio and study the fundamentals of stock. If the stock is overvalued with high P/E, don’t wait much and sell as you get the opportunity. On contrary, if a stock has stable balance sheet and good performance, it falls following the market trend and will surely rebound.

While buying, a wise investor would surely gain; just be prospective. First, if you are long-term investor, identify the recession-hit stocks with good fundamentals. These are a good pick because they are trading low following the market trends. Once market recovers, they will follow the suite. Secondly, blue chips have been a buyer’s choice in such markets because they are the market movers. So keeping in view that recession will be over, they can be most relied upon. On similar note, better stay away from penny stocks. Thirdly, invest in stocks based on items of necessity like FMCG, telecom etc. rather than luxury items because even if the whole economy is in recession, human’s basic needs have to be fulfilled and these stocks will never die out.

The crux is be optimistic and keep investing because sometimes your good investments are the ones which you don’t make.

Renuka Kinger