Friday, April 13, 2012

How to determine the trend of the market

Richard Russell, in his excellent book on Dow Theory, says:

The trend of the market is determined as follows: successive rallies advancing above previous high points with ensuing declines terminating above preceding low points are taken as bullish indication. Rallies that fail to penetrate preceding high points with ensuing declines breaking preceding low points carry bearish indication. 

In other words, Higher Highs and Higher Lows constitute a bull market, while Lower Highs and Lower Lows represent a bear market.

 For the past few weeks, the Nifty has been making lower highs - 5630, 5500, 5400, 5378, 5302. The lower lows pattern is not symmetrical with the lower highs, but it is visible. It is not symmetrical because after every lower high, we did not have a lower low. We can establish that lows have found support around 5150. If the Nifty closes below 5150, the pattern of lower lows will be confirmed, giving a clear down trend. We should find out next week if the Index is entering a downtrend.


Amateur trader said...

I have changed the candle pattern that I follow to line for a fresh view and have stumbled upon a pattern that looks a lot like H&S for Nifty Could you please validate this hypothesis. I am an amateur and your guidance will be a great help. I have marked out the vol changes for ease. I am posting the same on my blog page as I cant paste the same here.

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