Earnings, Rallies & Ranges.

Siva Sunku writes on the impact of quarterly results on share prices. Is there a connection?

My Notes: The market will usually discount results prior to their announcement, thus justifiying the saying “Buy the rumor, Sell the news”. But, one exception is earnings surprises. if the surprise is on the downside, markets will quickly respond by falling. If the surprise is on the upside, then this is often the start of a new up move as the big players slowly adjust their forecasts on the upside.

While the trading range in the Nifty remains intact, Tuesday’s price action was unusual, to say the least. Here is what we wrote to our subscribers on Tuesday evening:

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Today (Tuesday, April 13), Nifty futures moved in a narrow range of just 30 points between 5308 and 5338.

Research on Narrow ranges in nifty futures:

From March 20, 2008 to April 13, 2010 (today) there is only one instance when daily range in Nifty futures was equal to or less than 30. This was on January 15, 2010. After a significant rally, markets were (probably) consolidating. Now, January 15 was a friday, with two days of holidays before markets opened on Jan 18. The Nifty rallied by over 30 points on Monday, January 18. But this rally was a false signal, as it later turned out. Starting Jan 19, came the sharp decline we saw in January – February with futures falling all the way down to 4667 on Feb 8.

What we should understand:

1. A range of just 30 points is a rare occurrence.
2. A significant move should emerge in the next few days.
3. It is possible that we may see a false move before the real trend emerges.

My Notes:

What is the direction in which a big move can emerge? After nine weeks of gains, unfortunately, the easiest way could well be on the downside, towards a severe correction. But this is only an opinion. If the Nifty decides to take off on the upside, we will follow. So, let the market tell us where it wants to go.

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