Buying cools down | stockbee


Buying cools down

  • The buyers stepped in to the market from middle of August onwards. August 16 was the turning point in market as that day after reaching extreme intra day readings the market turned around. Since then there have been 22 days on which 4% bullish breakouts exceeded bearish breakouts. Since then there have been 7 days on which 4% breakouts on negative side has exceeded positive side.
  • The stocks which bounced back in August started rallying and in last few weeks, there was a virtual buying frenzy as market participants realized the sub prime mess has little impact on the overall economy and market is discounting it. The Fed action acted as further stimulus to the move.
  • Such red hot momentum is common during start of a rally. At some stage it reaches extreme and in the short time frame there is a reversal on many high flying stocks. Some never come back after such reversal for months or years, some hang on to their gain without getting dented and again breakout after few weeks.
  • When market enters such red hot zones of momentum, the good along with the bad can have wild moves in compressed time frame. Some of that we witnessed recently on Chinese stocks and many low quality speculative stocks in recent weeks.
  • During such periods almost everything you buy on breakout works.
  • So the buying frenzy has slowed, now what? We will enter a reversal/correction/pullback/consolidation phase on many stocks.
  • While there will be lot of talk of double top and sudden reversals and the usual perma bear gang will try and scare you with all kinds of scary scenarios, one thing to remember is that momentum takes long time to reverse on bullish side ( on bearish side sudden reversals are common). Plus once momentum build it tends to feed on itself.
  • So at this stage I will go with the IBD hypothesis, that we are in early phase of next bull leg and good quality stocks breakouts needs to be bought.

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