Best Time To Buy Into Nigerian Stock Market – Technical Analysis Of Share Prices Lets You Know When To Trade Cheap & Sell High Using Price Levels & Charts
While economic and fundamental analysis lets you uncover the top sectors to focus and the stock to rightly invest in, as I have shared on how to find best-performing stocks, you still need to perfectly have a good grasp of timing as a strategy in the stock market. As the saying goes, you can buy a good stock at the wrong time or buy the wrong stock at a good time. The latter has a higher chance of adding profit percentages to your portfolio even though the company’s fundamentals are not impressive while the former can drag you to a loss position. It all boils down “when you bought the shares”
Besides, one bad experience that made me take this advice seriously was when I invested in international breweries, I had shared my experience here on how I started trading the stock, mistakes and finding a better path to profit. I bought the company’s share at N24 and in few days, the price dropped to N16 and I quickly sold off, only to see the same stock reversed and surged to a new high. What would have been the missing knowledge that made me sell off quickly? I never perfected timing as a good stock trading strategy.
So, how then should I time my stock, after following your guide to picking the best-performing stocks to buy? The simple answer is, pay attention to stock price action at key levels and validate it with trading indicators. This is what we generally tag technical analysis of Nigeria stocks market.
Technical analysis is the process of analyzing and forecasting the direction of share price based on past movement or repetitive patterns. It helps you look at the overall market trend to ascertain investor’s sentiment about a company’s share.
A lot of traders have tried to compare technical analysis and fundamental in a bid to find which is perfect for stock trading but I am here to boldly say that “if you have preferred one to the other, you might be making a big trading mistake: fundamental helps you uncover the safest sectors and stocks to buy while technical drills down to the right time to buy”.
Let’s take CCNN – Cement Company of Northern Nigeria as an example. We have already done our analysis of the company’s financial positions using key metrics like profitability, liquidity, stability and rated the share a good buy, but did you know that, in the midst of the buy rating, you could buy at N21 and see the price fall to N15? The reason is simple, the price might have skyrocketed to the peak, buyers were already exhausted and if the volume of purchases is not strong again, investors will start taking profit by selling their holdings. Technical analysis lets you check the status of the market direction, so you wouldn’t lose out on entry.
I am not saying that CCNN will fall but the short term correction is something you need to watch before buying your next share in the company, except you are investing for a long term. Even, in long-term, you still can’t rule out the importance of technical analysis because you can apply it to the daily, weekly and monthly chart.
Why do we need to analyze stock technically before buying?
- It tells you whether the market is going up or down
- It tells you whether the trend (up or down) is strong or weak.
- It also tells whether the market is about to reverse to the other side; if it is going up, you get to know when it is about to change to the downside and vice versa.
Here, I will be sharing my personal combination of tools to trade profitably in Nigerian stock market using a secret finance blog. I only reveal this website to my subscribers in my exclusive trading club.
The first step to take when analyzing stocks for a perfect buy and sell time is to locate the key levels. Key levels are share price regions where a lot of buying and selling activities takes place. Buyers struggle to keep price going up and sellers were able to take over, or sellers dragged price to a region they couldn’t sustain then buyer push the price upward.
I always watch these key levels on every stock before deciding on the perfect time to enter. Let’s take a look at the chart below for better insights:
The yellow line labelled “A” is the upper key level known as resistance; it is that region price increases to before reversing. At least you can see how price reached the key level “A” twice before eventually breaking out. The same applies to “B” which we call support, the share price touched that region twice too before going up. My advice is this “When you see regions share prices approached several times before reversing, that region is referred to as the key levels.
The key levels are very important as that’s where buy opportunity surfaces if the price had been going down and close to key level “B”, it signals the potential of reversal to the upside. But, you might be at a risk of losing part of your portfolio value if you buy at a region close to key level A as price reversal to the downside is likely.
The next technical tool I explore is directional movement index, this tool never fails as it accurately reveals the general market trend instantly. I don’t need to interpret the chart or do the analysis but on display of three signal lines – strength, bull and bear, I already know what investors’ sentiments are.
Let’s take a look at directional movement index:
The directional movement index is the graph that contains, red, blue and black signal line. The blue represents an upward trend, the red is for downward trend while the black is the strength of the trend.
Here is how to interpret the graph and take trade decisions:
- When the blue and black line are trending up and above the red line, it signals a strong and bullish trend; the share price is going up as indicated by the yellow lines tagged “1” & “3”.
- When the red and black lines are trending up and above the blue line, it signals a strong bearish market; the share price is going down as indicated by the yellow line “2”.
- What if the blue and red lines are above the black line? it means that the share price is consolidating, that is no up and down market, just in a straight line. I have seen this play out several times on some company’s share, the price is neither going up nor coming down until a major news is released. In such situation, watch out for a breakout soon.
This pattern had once emerged on Cement Company of Northern Nigeria shares before it broke out and went to a new higher.
Look at the regions painted yellow on the chart below: the blue and red lines were above the black line, and price consolidated (no up, no down move) until the black line crossed the red line to sign a major upside.
I really can’t stress how powerful this tool is as it had helped me find the perfect time to buy.
So, if you refer to my fundamental analysis of CCNN stock, I can now conclude that the crossing of the black line above the red line signals the entry of new buyers and eventually price went from N16.20k to N20 in 2 weeks representing 62% return.
Please note that the ADX indicator is not 100% accurate, In my book, you will learn how I use it with three other leading indicators to confirm my buy or sell signal.
Do really think this is a great idea on the best time to buy Nigerian stocks? Please share your suggestions.