Market Correction and Technical Analysis
A reverse trend in a bull market is known as correction. It is process of declining the stock price from a high point. Small corrections will bring the overvalued stock prices to fair prices. Foreign Institutional Investors have major role in the Indian market. If they decide to book profit in a high point, it may lead to correction. Market sentiments have major role in the fixing of share prices. The news like decreasing interest rates and good rainfall will make positive impacts in stock markets. The news like bomb blasts and earthquakes will have negative role in the stock market. A decent stock market correction is 10% or less than 10% from the recent top.
Corrections in the stock market are inevitable. Correction and stock market crash is entirely different. Crashes will give excellent opportunity to buy Puts. What is a price of a security mean? It just means that a point in which the buyer wants to buy and a seller wants to sell the particular security. Technical analysis have major role in the prediction of stock market crash. Technical analysis is a process in which historic price movements of the security is analyzed. Technical analysis is widely used by technical analysts and traders.
If there is a panic situation, it will be definitely reflected in those indicators. When the stock prices started to go downward, the technical analysts will give sell signals. They are mentioning a rough way ahead. Investors sitting in profit can book profit at those levels and traders can make profit by short selling.
Different Technical Indicators
Bollinger band was developed by John Bollinger. It is a versatile tool widely used in technical analysis. There are three components to the Bollinger band indicator.
20 period simple moving averages is used.
Upper band means two standard deviations above the moving average.
Lower band is the two deviations below the moving average.
Fibonacci Retracement Levels
Fibonacci retracement levels are the key tool used in the technical analysis. Fibionacci series are formed by the key numbers developed by Leonardo Fibonacci in the 13th century. Fibonaci numbers are calculated by the two extreme points in a chart divided by the Fibonacci ratios like 23.4%. 38.6%, 50%, 61.2% and 100%. These ratios play important roles in the market. The method is used to find the critical points in which the existing trend is reversed.
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