Markets again in trading range.

I have to apologize for not writing in recent days. A lot has moved in the markets since the last post. The Nifty fell to touch the 5000 target identified earlier. Another bailout package – this time by the Europeans saw big gains on Monday but a decline in enthusiasm on tuesday when Asian markets fell a lot, Europe somewhat while the US remained flat with small losses.

Euphoria is not a sustainable basis for a rally. Remember last year’s election rally in India? A subsequent correction saw half the gap being filled. One year later, we are 15% higher from the first post gap numbers – as compared to a 25% gain in the S&P 500 for the same period. My point is : Euphoria hardly ever leads to more gains. At best, the market enters a prolonged period of consolidation.

The problems of the Eurozone countries, as well as the bubble in China will not go away by throwing money at it. The market understood this one day after the big rally – note how the Euro has given up all its gains. A weak Euro makes Chinese exports expensive, causing worries in China. The real estate bubble has already made China ready for a crash – it seems the question now is : when rather than If. The Shanghai stock exchange is down 20% from its highs, qualifying the decline as a bear market.

What is my analysis of the Nifty?

The Nifty has seen a pattern of lower high, lower lows. This is a downtrend. Subsequent price action can be:
1. The downtrend continues. The Nifty should remain below 5295 – a minor pivot and subsequently close below 5100 which was roughly the mid point of Monday’s price bar.
2. The Nifty builds a trading range somewhere between 5100 and 5200, then breaks out from it.
3. The Nifty stages a sudden V shaped recovery, crossing its minor pivot of 5295 and reversing the down trend to a new upmove.

This is what the possibilities are and we should follow what the market does.