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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » The 3 Things We WANT to See During a Market Pullback

The 3 Things We WANT to See During a Market Pullback

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sriranga

sriranga
Co-Admin
Pullbacks happen.

Contrary to what we all might wish for, even the very best stocks don't go straight up for months on end with no corrections.

The same goes for the stock market as a whole. Even during the strongest bull moves, painful corrections occur.

These corrections often last days, but sometimes they last weeks and still don't disrupt the overall uptrend.

The dirty little secret that amateur traders fail to understand is that pullbacks are a good thing…IF they're “constructive” in nature.

While it’s no fun to watch your portfolio drop during a session – or even several sessions – professional traders understand that constructive corrections give stocks (and the market as a whole) a chance to adequately rest up and continue their upward moves.

If stocks go up continuously without normal “resting” periods, they become much more susceptible to sudden and dramatic crashes. These crashes can be brutal to a portfolio and extremely difficult to recover from.

Normal (constructive) corrections help stocks avoid these sudden crashes.

So what makes a pullback constructive and how do we tell the difference between a “constructive” correction and a “dangerous” correction?

Three things, actually:

1) Constructive pullbacks occur on lower volume.

Volume tells us how much conviction is behind a price move. If we see heavy volume, it tells us there is more force behind a move, it’s more aggressive. If we see lighter volume, it tells us there’s uncertainty behind the selling, not everybody’s buying into the move.

Ideally, we want to see pullbacks occur on volume that is less than the previous day’s volume and/or less than the volume seen on recent up days.

2) Constructive pullbacks don’t break below key support levels.

Nicolas Darvas, the father of the Darvas Trading System, was famous for recognizing that the best stocks actually pulled back quite often and quite dramatically, but they never fell through their key support levels (which Darvas usually identified with his famed “Darvas Boxes”).

When pullbacks occur, we don’t want to see them fall through key trend lines or moving average lines that have been maintained throughout the overall uptrend. Pullbacks that break these levels are a big warning sign, even if they don't actually trigger a sell-stop.

3) A single day’s action is rarely a cause for concern.

Even the best stocks (and strongest bull markets) can have a brutal session here and there. The key is that they usually recover quickly. A single day of selling is rarely a cause for concern, even if it does occur on higher volume. Some profit-taking during a strong bull move is to be expected and sometimes this profit-taking creates panic among the market’s weaker holders. This type of behavior can produce some wild one-day swings.

However, a constructive market environment will normally rebound quickly by reversing higher or leveling off in the days that follow the dramatic decline. Top traders don't get spooked out of winning positions based on a single day of selling.

Edited article
by DARRIN DONNELLY from http://www.darvastrader.com/

http://sharemarket-srilanka.blogspot.co.uk/

sriranga

sriranga
Co-Admin
Nicolas Darvas And His Amazing "Box Theory"
- http://forum.srilankaequity.com/t17825-nicolas-darvas-and-his-amazing-box-theory?highlight=darvas

http://sharemarket-srilanka.blogspot.co.uk/

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Smart people will realize the message give.

KDDND

KDDND
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
ahhh....... haaaaa....

Good things to read & learn a lot...... taste a lot.....
If some one doesn't know these KEYs....
he/she is more likely to act foolishly in PANICK situation....

Thxxxxxxxxxxx SRI........!!!! Basketball

D.G.Dayaratne


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Stock market in not an isolated system It is part of Sri Lanka socia-Economic system

You can see lot of inefficient people get promotion in govt and public sector offices
In paliment also"WEDA BERI DASALA "get ministerial positions

You can see this phenomenon everywhere Stock market is no exception

malanp


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Sri

Thanks for the valuable article

besthope


Manager - Equity Analytics
Manager - Equity Analytics
The 3 Things we DONT WANT to see during a Market Pullback

1. illuminati making a appearance in forum.

2. Prince using Head and Shoulder shampoo for his dandruff problem.

3. NZ Boy returning to sri lanka

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Very Happy.

Yeah, wonder what happened to all those doomsday predictors and I told you so people. Along with illuminati they can appear in a correction . We would really like them to appear now and say what their opinion is and whether we should expect a big drop ( so we can sell now) .

Atleast Price is talking about 200 points correction and then further up.

Maybe NZboy is in Sri lanka already.



@besthope wrote:The 3 Things we DONT WANT to see during a Market Pullback

1. illuminati making a appearance in forum.

2. Prince using Head and Shoulder shampoo for his dandruff problem.

3. NZ Boy returning to sri lanka

Kumar

Kumar
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Timely one. Thanks.

K.Haputantri

K.Haputantri
Co-Admin
Thanks Shri for sharing a timely article. I hope our share market would be matured enough to behave the way described in the article, despite it being a small one.

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
@K.Haputantri wrote:Thanks Shri for sharing a timely article. I hope our share market would be matured enough to behave the way described in the article, despite it being a small one.

First of all the most of the retail participants need to be matured.

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@Redbulls wrote:
@K.Haputantri wrote:Thanks Shri for sharing a timely article. I hope our share market would be matured enough to behave the way described in the article, despite it being a small one.

First of all the most of the retail participants need to be matured.

Mature markets are very information sensitive. That is not because the retailers are smarter or stupid. That is because the supply of shares is so huge that the price of any share is very stable

So $1 share is often $1 because of the supply of buyers and sellers. Only change occurs if some special information is released

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