16TH

MAY
2020
SPECIAL ARTICLE

THEHOW, WHEN,WHAT
OF SELLING
IN EQUITY MARKET:

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The How, When, What of Selling in Equity Market:

• “Defence is the best form of offence”, unless you have a strong defence to protect yourself
from large losses, you absolutely can’t win big in the game of investing.
• Always cut short, limit your losses. To do this takes never-ending discipline and courage.
• Lose small and win big, is the holy grail of investing.
• After the stocks gains 20–25%, cut short your losses at 7–8%.

How to be successful in stock market?

Successful investors make many mistakes, and their success is due to their hard work, not luck.
They just try harder and more often than the average person. There aren’t overnight successes;
success takes time.

When you’re holding on to a big loss, you’re rarely able to think straight. You get emotional. You
rationalize and say, “It can’t go any lower”. But, keep in mind that, the stock price can go to zero as
well.

Reasons to Sell:

1 Protect Capital
• The 8% sell rule
2 Lock in Profits
• Selling due to weakness
• Selling into strength
3 Distribution in the General Market

1. Protect Capital

As the losses increase, it becomes more difficult to break-even

The above table emphasizes the importance of cutting short your losses. It can be clearly
observed that as the losses increase, it becomes more difficult to break-even. We are not talking
about making profits here, just break-even.

The importance of cutting losses can’t be emphasized more. To make money in the stock market,
one should have good capital size. An investor (Rs 100L capital) with annual return of 20% makes
the same money as an investor (Rs 50L capital) generating 40% return on capital (RoC). We all
know the difficulty in generating higher RoC.

Hence, to protect the capital, always cut your losses at 8% from your purchase price.

The rationale for the rule is: When you use charts to time buying decision, your stocks rarely fall
8% from purchase price. So when they do, you’ve made a mistake in your selection or a general
market decline may be starting.

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2. Lock in Profits

Selling on weakness

• Institutional selling: Always follow big money. Institutional selling can be observed in spike in
volumes. If a stock declines on higher volume, try to exit the stock.
• Breaking key support: Support plays a key role in the stock’s price movement. Some examples
of key supports are 50-DMA, 100-DMA, 200-DMA, and trendlines, among others.
• Gaps down: Try exiting a stock if it gaps down.

Selling into strength

• Take most profits when a stock rises 20–25% from its buy point.
• Exception: When a stock rallies 20% or more in the first three weeks. This shows extra poten-
tial and should be held for at least eight weeks.

3. General Market Distribution

What to watch for:

• Distribution day in key indexes

• General market direction is down
• Current position in market cycle

Distribution Day: If a major index (Nifty50 in our case) falls 0.2% or more on higher than previous
sessions, then it qualifies to be a distribution day. Accumulation of distribution days signals the
weakness in the market.

A bull market tops out and turns down before a recession sets in. Hence, looking at economic
indicators is a poor way to buy or sell stocks and is not recommended. Similarly for the bear
market as well. Stock markets are a leading economic indicator, not a coincident or lagging
indicator.

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 India CNX Nifty 50
Status changed to
Downtrend, Feb 27

Distribution day count

resets to zero(5% rule), Apr 27
Status changed to
Status changed to Rally
Downtrend, Feb 01
Attempt, Feb 05 D2
D3
D1

D1
D2

21-DMA Status changed to Rally

50-DMA
Attempt, Mar 26
100-DMA
200-DMA Status changed to
Confirmed Uptrend, Mar 31

Confirmed Uptrend -> Uptrend Under Pressure: Market status should be downgraded to an
“Uptrend Under Pressure” as the distribution day count rises to 3–5.
Uptrend Under Pressure -> Correction: If the distribution increases further to 6–8 or key market
index breaches the key moving averages, the market status is changed to a “Downtrend”.
Uptrend Under Pressure -> Confirmed Uptrend: Market status should be changed back to a
Confirmed Uptrend if Nifty retakes its previous rally high intraday.
Downtrend -> Rally Attempt: Once the market is in a Downtrend, investors are advised to
trim/exit their positions. However, it is important to find the market bottom. If the market is able to
stay above its correction for three consecutive days, it is said to be attempting rally. Hence, the
market status will be changed to a “Rally Attempt”.
Rally Attempt -> Correction: Market status is reverted if the major index (Nifty50), breaches its
previous correction low.
Rally Attempt -> Confirmed Uptrend: For further conviction, we wait for the market to have a
follow-through-day (FTD). After an FTD, market status is changed to a “Confirmed Uptrend”.
Follow-through day: If the market (Nifty50, in our case) rallies 1.2% or more on higher than previ-
ous session volume, then it qualifies to be a follow-through day.

Key technical indicators to identify weakness in a stock:

• New highs on low volume: Some stocks will make new highs on lower volume. As the stock
goes up volume dries up. This means, institutional investors have lost their appetite for the
• stock.
Example: (Titan)
Closing at or near day’s low: Some stocks end near their day’s low for several days, this indi-
cates the stock has made a top.
Decline from peak: You may occasionally want to sell if a stock declines 12–15% from its peak.

Examples: Cummins, Whirlpool of India, Godrej Industries, and ITC

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TITAN

Top Formation

Making New highs

on lower volume

50-DMA
200-DMA

VINATI ORGANICS

Selling on heavy volume

Breakout

50-DMA
200-DMA

ITC

Breakout

Breaching key supports

on heavy volume

50-DMA
200-DMA

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RBL BANK

Breakout

Breaching key supports

50-DMA
200-DMA

GODREJ INDUSTRIES

1
2 3 Resistance at 200 DMA

4
5

50-DMA
200-DMA

WHIRLPOOL OF INDIA

Making new highs on 50 DMA breach on

low volume heavy volume

50-DMA
200-DMA

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Research Team:
Mayuresh Joshi, mayuresh.joshi@williamoneilindia.com
Kongari Rajashekar, kongari.rajashekar@williamoneilindia.com
Rushit Sejpal, rushit.sejpal@williamoneilindia.com
Satya Narayan Panda, satya.panda@williamoneilindia.com

Disclaimer: William O Neil India Investment Adviser division, is one of the divisions of William O Neil India
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investments based on the contents of this document. Past performance never guarantees future results.

Analyst Disclosures: No part of his or her or their compensation was, is, or will be directly or indirectly related to
the specific recommendations or views expressed in this research report.

Disclosure of Interest Statement Companies where there is interest

Analyst ownership of the stock No

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