March 13, 2015

Do not catch a falling knife

When a trend changes to down or stocks start breaking important supports, you should stay away from the markets. At times like this, the 'Buy above" levels will be quite some distance away so it is important you respect them.

Many people however jump in and buy for the simple reason that if something was good buy at 100, it is an even better buy at 80-90.
Short answer to this approach is do not buy a falling stock... it is like catching a falling knife.

In the corrections witnessed post 2008 many stocks have lost close to 80-90% of their original value. At this time there are no supports and no buyers. Sellers rule as everyone wants to get out. In this case, you should not attempt to get in.

One should also remember that in the following rallyt the stocks which have corrected the most rarely gain the most. On the contrary, stocks which have corrected the least tend to show more strength in subsequent rallies.

Following chart of RCOM is self explanatory and is indicative of a lot of similar stocks.

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