When to Buy In Market Crashes

Today I will be answering the questions that I am getting quite often these days and the questions are –

Is this the right time to buy when the market is down? I am ready to hold on to the stock for few years.

Or

I am not a trader but a long term investor and so is this the right time to add more position to my portfolio?

Or

Can I invest in any good mutual fund here for long term?

I am sure many blog readers who have not asked me this question also has this question somewhere in the back of their mind as to when will be the right time to buy in the market crash.

Let me first share with you my couple of previous articles where I sensed the crash – Why Nifty Around 5600 is in No Trade Zone? on June 30th, 2011 and Understanding Signals of Market Crash & Sentiments of Retail Investors on August 10th, 2011.

Past is history and now we need understand when is the right time for long term investment.

When market starts falling people think they could start investing. Once they invest the fall continues and they invest more and suddenly they run out of cash and still their portfolio is down a lot. Now they are ready to wait for few years to get the capital back. Remember if you are not investing at the right time and at the right price you will actually not make any money but will actually loose money.

So let us first understand what needs to be done in a market crash.

1. Never try to catch the fall

Let me be very frank. Retail investors most of the time try to catch the fall because they think they will be left out in the next bull run. This left out feeling makes the investors invest when the market starts cracking. Investors think they will make lot more when they invest in the falling market but they don’t understand that when trying to invest in the fall they still need to invest at the right time and at the right price.

I would let the fall get over, get signals of market forming the bottom using technical analysis and then buy after the fall is over. There will be ample time to invest when market forms the bottom (Explained later).

2. Never assume market bottom

Never assume market is bottoming out unless you clearly see the signals that market is actually bottom out. Market crashes are always followed by strong short covering rallies and if you don’t understand the support and resistance you can be carried away by investing in the short covering rallies with the assumption that market has bottomed out and you have missed the bottom.

3. Never trade against the trend.

Always go with the trend. Currently the index trend is down and if you are like me not very fond of short selling remaining in no trade position is also a position in the market.

When to Buy In Market Crashes

Now to answer the question is this the right time to invest let’s see the nifty chart for last 3 months.

Charts by Yahoo Finance

We see Nifty sliding from 5600 to 4800 pretty much in a straight line without any meaningful bounce of any kind and so I don’t think this is the right time to invest.

The question still remains when will be the right time to buy? The right time would be when either one of the two things happen in the market especially Nifty.

1. Nifty forms a tight range and it neither cracks down nor breaks out of that tight range. Break out above that tight range would be ideal sign for going long.
2. Nifty falls but keep bouncing from certain level which would be new support for Nifty. Using that support as stop loss you can invest.

In both the above scenario you can clearly see that you need to wait few weeks to see if Nifty either forming a tight range or it forms a good support. So instead of looking at levels like 4800, 4600, 4400 I will recommend wait for Nifty to give you signals on what needs to be done.

Share your views in comments below.