Big decline in mid cap stocks.

Today’s market action was significant in many ways:

1. The Nifty close was the lowest so far in the current down trend. New lows are usually bearish.
2. A gap up was not sustained, with the Index moving down almost 130 points before rallying by a small amount. Markets that open up and close lower are usually in bear phases.
3. A number of mid cap stocks were hammered. In fact, they were beaten down so badly that many of them are now close to their 2008 bear market lows.

With today’s decline, the Nifty has come down to test its 4950 lows made last week. This test gives a trade. It may be possible to go long with 4950 as the stop loss. Remember, Positions are taken after considering the environment for the day.

One more gap up

The Market is moving like a yo-yo —>  up one day, down the next, up again and so on. Day Traders have the advantage of avodiing overnight risk, but a large gap also squeezes their potential to make money.

If Nifty futures open higher by 70 points (for example), a lot of the possible gains are already in the opening price. How do you trade?

1. Fade the gap. Assume that the gap was against the trend, look to sell with a stop above the day’s high.

2. Trade the gap. Go in the direction of the gap, which is up. This can be done in many ways:

a. Use the Opening Range Breakout – 15 minutes cool off, then buy above the high of this 15 minute, with stop below the 15 minute low.

b. Wait for a correction to a pivot level or fibonacci support, then buy.

c. Look for a trading range / consolidation then buy a breakout if it comes about.

There can be many more ways of trading the gap, or even for fading the gap. each trader will develop his/her own tools. The important point is to have a view – will I trade it or will I fade it.