Most people understand that bear markets don’t last indefinitely, but the fear and anxiety, a bear market creates, can make the investors believe that it will last forever.

We often see opposites like life and death, or day and night, as distinct and separate, but in reality, these opposites coexist in the world. For example, while it may be dark in one place, it could be light somewhere else at the same time. Similarly, a bear market that is existing now, may actually be preparing for the next bull market at the same time. We don’t know when the bull run will begin. But it will. To prepare ourselves for the next bull market, it will immensely helpful to follow the wisdom and guidance of successful traders and make an effort to put it into practice.

In this article, I will be discussing how I will be preparing myself for the next bull run, how I am making my watchlists sharper, smaller and better day by day. The points discussed here are a culmination of the wisdom of great traders like David Ryan, Mark Minervini, Stan Weinstein etc., whom I adore the most. 

By the end of this article, you will have some clarity on what one should focus on now and what to do when the time arises. Let’s go in.

Clear the clutter:

Look into your portfolio in your Demat account right now. Use that filter option and sort the stock portfolio in the order of biggest losers in %. The first thing one should think of is to sell the stock that has fallen a lot. Clear the clutter in your portfolio. Once the poorest performing stocks are removed you can look more clearly for newer, better opportunities.

Most think that they can recover the losses once the bull market returns. But the fact is the stock which has fallen more will take a lot of time to come back, even to break even. Sector leaders would have changed by then. You may miss many wonderful opportunities, if you keep on holding to these non performing stocks.

In a bear market the previous market leader can fall up to 50 -80%. I had written a detailed article on how this 50-80 Rule works.  You can read it here. So, remove the stocks from your portfolio that is performing poorly.

Select stocks that has fallen lesser:

Look for the stocks that fall little and show positive divergence with the broader market. Leading stocks will start doing higher high and higher lows when the broader market is doing lower highs and lower lows. 

Also look for the stocks that break out into all time high or at least 52 week high before the market registers an all time high.

See the stock below:

Weekly chart of Axis bank hitting an ALL TIME HIGH in October itself before the Market. (Stock is not a recommendation, for study purpose only)

Now, let us see the weekly chart of Airtel (not a recommendation)

See the tight range of consolidation, during the period when Nifty 50 was doing Lower lows.

Look for stocks forming Patterns:

One of the significant things to watch during the bear market is to see how many stocks are setting up for the up move. Look for the stocks that are forming Patterns like High tight flag,  Flag patterns, Cup and handle patterns. 

The more the number of stocks setting up, the earlier the possibility of a bull market. When the bull market is in its primitive stage, the leaders usually set up and show fantastic trading structures. Watch for it.

Also, look for the stocks that have a lot of follow through days. Follow through days are nothing but the continuous movement of price in the same direction. In my article on ANTS INDICATOR, I had mentioned how to spot the institutional buying and follow through days with examples. You can check it out if interested.

Watch the move of Nifty 50 Vs Nifty Small-Cap:

This comparison is highly effective in predicting the next move. After a bear market it is usually the large caps that will get enough funding for the move. Investors whacked out by the recent bear market will be skeptical to invest in small caps. Retailers coming out of the fear will be comfortable in investing in large cap companies when compared to the small caps. 

When this happens, you can see that the Nifty 50 will be the first to form a low and to break out. Even after this the small cap will be struggling to form an all time high.

See the image below:

Weekly chart of nifty small cap 100:

Even after Nifty 50 has broken into All time High, Small cap index is nowhere near to that. It is around 20% lower to the All time high as of today (Jan 2023).

See the significant poor performance. However, if all goes well, if the global market recovers, then it is a matter of time that funds will start flowing into Nifty Small cap. It will take time, but will happen in due course.

High Relative Strength Sectors:

Look out for sectors that are performing good in relation to the broader market. This can be done by checking which sectors have fallen less during the period when the Nifty 50 was falling. Also, the relative strength line is also a wonderful indicator to determine which sector can be the next outperformer.

In my article on Sector Rotation I had mentioned the banking space to be a potential star in making and see what the banks have done. However, the auto sector, consumption sectors now are taking a breather and are consolidating and have not worked well till date. 

As of today the outperforming sector seems to be the metal space. See the relative strength line of the metal sector, particularly in the last two to three months, in the image below:

Also, note that the RS line started rising exactly around June 2022, when the Nifty 50 made the recent low. (I mean the lowest point that Nifty has made in the recent fall)

Kindly note that the metal sector is cyclical in nature and one should be nimble enough to enter and exit when time arises. One should have strict Position sizing, risk management and clearly defined exit rules.

Relative strength works better when you can catch a trend earlier, because just like a stock goes up and down, the RS Line will also go up and down.

Look out for Volume Expansion:

Usually after a bear market fall, when the market starts to pick up on the upside you can see the volumes that are expanding along with the price.

This happens because of the fact that money starts flowing into the market again and investors are willing to participate in the market. 

Though it is not possible to rely on this data point on a stand alone basis, it will add to our confidence. 

See the image below, after the fall of nifty during the Covid times with huge volumes (pink arrow), within weeks the market started to stabilize and you can see the volume spikes on upside. 

However, point to be noted is the Covid fall was very aggressive and you can see that market didn’t even form a base after the fall. Market took off immediately after the bump and it rode all the way to make all time high. 

So, this time I don’t think that we can see the same kind of volume spike. However the volume will expand slowly on the upside along with the price move. Watch for it. 

Conclusion :

I hope I have given some valid points on what we should be doing when the global markets are in bear trend. Only when the global markets see some stabilization, we can see the bull run we expect in our market. 

The news flow is getting worse day by day and it is actually a positive note for me. It is always much darker before dawn. So, let us wait for some confirmation from the global trends and act when the time comes. 

If you like my writings check my other articles I have written. You can also subscribe to my newsletter to get my market insights delivered right into your inbox. 

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Happy investing!!!