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Tech view: How to gauge that a stock is likely to fall?

Every trader and investor have varied trading tools that aid in making money. When the market is in a bull-run, it becomes easy to trade as the overall sentiment drives the prices higher. The probability of making money is also significantly higher in a bull-run.

However, in a bearish market, or where the trend starts to turn negative, traders and investors need to be extra careful while executing a trade. It is important to know when a stock will start breaching significant support levels and starts to show a weaker trend. To identify such stocks, following indicators may help in identifying negative reversal.

Volume indicator: This tool is used in conjunction with support levels and assists in identifying the change in momentum. Normally, when a stock breaks a major support with higher volume, it starts exhibiting weakness and there could be a possible downside in the sessions ahead. The volume comparison can be considered of last two sessions or the last week, depending upon the duration of the trading bets.

Trend-line breakdown: A trend-line is a visual representation of support or resistance, drawn on the pivot points of an instrument. In simple words, two or three points are selected to draw simple line that assists in highlighting support and resistance levels. When a stock breaks the support trend-line accompanied with technical indicator or volumes, one can be sure of a breakdown and look for shorting opportunities.

Technical Chart pattern: The chart patterns such as Head and Shoulder, Double Top, Triple Top, Descending Triangle, Rising Channels, etc. provide adequate opportunities for selling once they show a confirmed breakdown.

RSI and MACD: The most common Indicators are the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). The RSI determines the strength of the stock, where if the value falls below 40, it is said to have started losing upside momentum. Similarly, a negative cross of MACD below the zero line suggests further downside.

Moving Averages: The commonly used moving averages are 50-day moving average (DMA), 100 DMA and 200 DMA. When a stock trades above the moving average, it is said to be in a bull-run, and vice-versa. Similarly, a convergence of moving averages also indicates positive and negative trends from a medium-term perspective. A negative crossover of 200-DMA with 100-DMA or 50-DMA is called as Death Cross, which suggests that a correction of nearly 10 per cent could happen in the counter.

Candlestick Patterns: A breakdown in the various candles stick pattern exhibits weakening of an existing trend. The major negative patterns are Bearish Harami, Bearish Harami Cross, Bearish 3 Method Formation, Dark Cloud Cover, Engulfing Bearish Candle, Evening Doji, etc. 


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