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Tuesday, December 8, 2009

How to make money when a market is trending sideways

When a stock market index starts to trend sideways after a sharp up move, it is usually a sign of consolidation. As if the market is stopping a while to catch its breath. The buying pressure eases some what - and that is reflected by lower volumes.

In other words, bears and bulls (read, supply and demand) reach an equilibrium state with neither getting the upper hand. There is no discernible pattern to the daily or weekly moves. This is a frustrating time for investors and traders.

How does one make money in such a sideways trending market? If you are a trader, then you need to identify the support and resistance levels - either for individual stocks, or for an index. Then buy near the support level and sell near the resistance level. Easier said than done.

What if you are a short-term investor? Your nimbleness and investing acumen will be tested. You need to identify sectors or stocks that have not performed great in the bull rally so far. Buy into them, and book profits quickly.

This is a time when savvier players with deep pockets tend to indulge in sector rotation. If it is tea this week, then next week it may be sugar. Banks one week, and metals the next. It may not be possible or feasible to catch each move. So concentrate on a handful of sectors.

For long-term investors, sideways trends need not be very stressful. Most will probably sit this period out, or book partial profits in stocks that were bought at lower prices earlier. This is also a good time to research individual stocks that have strong fundamentals.

By now the market has digested the half yearly results and formed a pretty good idea about the rest of the year. Retail, real estate, textiles, export-oriented industries are still not out of the woods. Infrastructure, capital goods, autos are doing better. Hospitality, travel and tourism are emerging from the doldrums. FMCG, healthcare are down turn proof. Telecom is facing headwinds.

Consolidation periods are usually followed by a resumption of the previous trend. In this case, upwards. Some times, these turn out to be distribution phases and end up with a reversal of trend. A look at the on-balance volume technical indicator can provide clues.

The smart thing to do is not to bet the barn on an upward or downward breakout. That would save one from huge losses. Be patient and track your researched stocks on a regular basis. The stock market always gives opportunities to buy at reasonable, if not cheap, prices. Set realistic targets and book partial profits when you achieve those targets.

Related Posts

About Volume and On-Balance Volume (OBV)
About Support and Resistance levels in stock chart patterns

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