Now that Mr Market waits for a bottom, here’s a way to cherry-pick your stocks at discounted levels!
This tool can help you know the levels at which you should enter the stock. Such tools can help you beat Mr Market’s erratic behaviour.
From March 2020 to October 2021, Nifty roared like never before! Bulls led Nifty from 7,511 to 18,604, a wild run of almost 150 per cent in a matter of 19 months. However, the last eight months have been quite disappointing as Nifty plunged about 18 per cent from its lifetime high. However, every investor knows that fast and strong corrections are one of the many behaviours of Mr Market. Such behavior of Mr Market leads to good quality stocks being thrown at dirt-cheap value. The point here to be made is that this behaviour is used by many investors for bottom-fishing of good quality stocks that get discounted due to such erratic behaviour of Mr Market.
However, the problem is that no investor knows where the bottom is. With some help of simple technical tools available on almost every technical window, it’s often missed by the investors. Such tools help predict the likelihood of market bottom, which in turn is helpful to pick good quality stocks. One such tool is Fibonacci retracement.
Let’s deep dive into the world of Fibonacci numbers first. These numbers are derived from simple ancient mathematics eg. 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 and so on, are the Fibonacci numbers. If you observe, each number is equal to the sum of the previous two numbers. Now, if you select a number, say 89 and divide it to its preceding number 55, we get 55/89= 0.618. Similarly, if we now take 34 instead of 55, we get the result of 0.382. This is generally found everywhere and Fibonacci numbers are true in nature. Thus, traders also use the Fibonacci reference in technical analysis. Besides, 23.6 per cent, 38.2 per cent, 61.8 per cent, and 78.60 per cent are some of the ‘Fibo levels’ that market participants often look at. Fibonacci retracement levels are those horizontal levels where supports & resistances are likely to occur. While each level is associated with a percentage value, it is important to watch the price action that happens at these levels.
Let’s apply Fibonacci levels to one of the fundamentally strong stocks like TCS.
Applying the Fibonacci retracement level for the 2020-2021 rally, the 38.2 per cent level falls at 3,073.89. Interestingly, this is the point, from where the stock rallied 9 per cent in just four trading sessions. The stock has rebounded from this level amid strong value-buying interest. Similarly, the 23.6 per cent level of 3,444.28 also saw good buying earlier. In a bull market, the dip between 38.2 per cent and 61.8 per cent is considered normal and a healthy correction.
Thus, this tool can help you know the levels at which you should enter the stock. Such tools can not only help you beat Mr Market’s erratic behaviour but most importantly, shall earn you greater wealth in due course of time when Mr Market turns happy!