In the past year, the NIFTY index (and many funds alongside it) has barely moved, hovering around zero or even negative returns. In such a sideways market, the question of opportunity cost looms large. Many investors find themselves wondering wouldn’t fixed-return instruments have been better? But is that really wise? Because while the index stayed stuck, specific stocks quietly delivered solid gains. Which brings us to the more important question – Is this the right time for selective stock picking, and more specifically, momentum plays?
Why Momentum matters
Stocks don’t move in straight lines. They rally on market sentiment, bursts of positive news, liquidity shifts, and of course the moves of FIIs, DIIs, and large institutional traders.
Warren Buffett’s classic advice is to “be fearful when others are greedy and greedy when others are fearful.” While that works beautifully in extreme euphoria or panic, in balanced markets I prefer a different approach – ride the tide, don’t be a contrarian. When big money flows into a sector or stock, the probability of momentum continuing is higher, and fighting against it can prove to be costly.
Range-based movements
In a sideways market, many stocks oscillate within a range for months. No big breakouts, no collapses, but just opportunities hidden in short-term momentum bursts. These “mini-trends” give disciplined investors entry points, provided they respect the technical setup. Take for example the following stock trend. The duration spans across multiple months, and still there aren’t any major breakouts. But it still gives entry opportunities when the stock is gaining short-term momentum bursts.
Technical Indicators as a Compass
A simple rule of thumb: buy at support, sell at resistance. Of course, markets rarely let you time them perfectly, but understanding historical support and resistance levels dramatically improves your odds.
Momentum indicators act as a compass here. I personally lean on RSI (Relative Strength Index) and Volume indicators for tracking momentum direction and strength. Additionally, MACD (Moving Average Convergence/Divergence) is an useful guide. Don’t stop at surface-level learning and dive into the nuances. For instance, RSI isn’t just about crossing 70 or 30; RSI divergences can be powerful signals. Remember the adage “little learning is dangerous.”!
Following Smart Money
Momentum isn’t random. It often follows where institutions are putting their bets. I track some of these by checking mutual fund holdings via RupeeVest. For global equities, quarterly 13F filings are great resources showing where big-name investors are building positions. While these are lagging indicators, they’re still good enough to ride medium-term trends.
Sector Rotation
Markets don’t move all at once; sectors rotate. Policies, quarterly results, or macro trends can put one sector in the spotlight while another cools off.
For example, hospitality stocks are currently riding strong demand signals and robust earnings. Ask yourself: Would you rather back the “best stock” in a laggard sector, or ride the broader wave of a hot sector? The odds usually favor the latter.
Stock Fundamentals as Safety Net
Momentum without fundamentals could turn out to be a dangerous proposition. I avoid mid and small caps especially that haven’t delivered incremental growth over multiple quarters. Simple checks on Revenue, PAT, OPM%, EV/EBITDA, EPS (via Screener) can filter out operator-driven stocks running only on hype.
Exit Strategy – Know when to step off
Momentum plays aren’t forever. For trades spanning weeks to months, a predefined exit plan is non-negotiable. That could mean any combination or all of the following –
- Selling after X consecutive negative sessions,
- Exiting on a Y% drop from recent highs,
- Or using indicator-backed reversal signals.
Avoid being a maximalist. The goal is consistency, not perfection.
The following chart shows an example of stock going through dull phase, followed by a momentum run from the support level. Your exit strategy would then look for reversals pattern backed by technical indicators. In this case, once you study RSI, you will see higher lows isn’t a bad thing after all while the momentum continues to play.
Risks
The biggest trap? Catching a falling knife! Once a support level breaks, blindly betting on a reversal can be disastrous. That’s why stop losses at key supports are essential. Some stocks do fall into a long-term bearish grip (such as the below stock pattern). So understand when to cut losses early, not hope for miracles.
Momentum investing isn’t about guessing the next big move. It is about stacking probabilities in your favor. By combining Sound fundamentals, Technical indicators, Institutional flows, and Sector rotation insights, you build a structured framework for entry and exit. You won’t get every trade right. Macro events can derail even the best setups. But with discipline, momentum strategies can help you ride the waves instead of sitting idle in a stagnant market.
