Thursday, November 20, 2008

Bear Market continues, Nifty, Sensex may go below October lows.

The Nifty fell to 2500 before recovering a bit to close above 2500. Compared to most world markets, the Nifty did better, actually losing less. I am not sure if this is any consolation to investors who have seen almost 80% of their capital vanish.

The Test has come.
When the Nifty closed at 2525 on October 27, and subsequently rallied, there was a sense that the Index will fall again for a 'test'. That event has now come about with the Nifty falling again to 2503, today.

How will this test occur ?
First, The index should hold the 2500 lows. This will happen if the Nifty does not close below 2500.
Second, slowly, steadily, the Nifty needs to rally and eventually cross 3240, the pivot high made after the October 27 decline. This could happen fast, or it could take its own time. That's not a problem. In fact, the more time it takes, the better.

What do you do while the 'test' goes on ?
First, we need to understand that this is a bear market. Momentum clearly favors more downside.
Now, with this understanding, traders may buy when there is a buy signal on intra day charts. Keep a stop, plan to take profits if there is a move in your favor.
Going short is more difficult, although the trend favors short sellers. The difficulty lies in keeping wide stops. If you go short with tight stops, chances are you will be stopped out. Consider going short after a short term rally that lasts 2 to 3 days. Will such an event occur ? The answer is yes, sooner or later.

A breakdown in the Index may occur below 2500, probably leading to another free fall all the way to 2200. A rally will face resistance at 2600, then 2700, then 2900. At this point, the Nifty faces significant resistance at 2900, although these levels will change with time.

Does Technical Analysis Work ?
The answer is Yes. Recently, the Nifty was inside a trading range between 2900 and 3200. I had suggested that the Nifty will have a target of 2600 if the 2900 support breaks. the support did break, and today's Nifty low was 2503. The issue is: Can you trade on my analysis ? The answer is no. Trading is finally an activity that requires confidence. You have to develop your own rules. You can use inputs (example: my analysis) to clarify your rules, but the eventual decision should be yours.


Mind Without Fear said...

Dear Sir,

This is an extremely insightful article. Personally relevant for me are the parts "What do you do while the 'test' goes on?" AND "Can you trade on my analysis?"

We are indeed fortunate to have a master wiling to share his insights with us. Rest is up to us/me as you also point out.

Thank you again. Warm regards, ....

s.k said...

Dear Mr. Sukhani,Hope you recollect my earliear posts wherein I said "Before touching 3350,Nifty likely to go to within 3-5% of Oct lows"How accurate?But the sad part is during this period only I lost 15K due to erratic/excessive trading in put options with tight stop losses.

Uma said...

Great article. We always discuss the accuracy of technical analysis but a trader's greatest failing is our own human (psychological) constraints.

myinvestorsplace said...

Crude oil bear market continues and supplies far exceeds demand in underemployed economies.

MyInvestorsPlace - trading, value, investing, forex, stock, market, technical, analysis, systems

News That you can use