Sell the News ?

The Indian Markets have seen gains of 12% in just four trading days, with the Nifty closing at 4260 today, up from its close at 3820 4 days ago. The anticipation of a victory in the confidence vote has sent the market moving up. The actual news of the victory may then turn out to be something of a damp squib for the market.
With 12% gains before the actual event, it is possible that the Nifty may see at least a short term top on Wednesday morning when the market should open higher after the victory news.
Except for the very short term when euphoria rules the market, nothing has changed. As the Government continues, elections will be held on schedule, around march or April of 2009. And, what will the government do till then ? With Parliament divided right accross the middle, What can it do ? Not much.
Markets hate uncertainty. A November election would be cheered for the simple reason that the uncertainty will end soon. Now, the fate of the govt remains in the balance almost every day, the outcome of elections is unkonwn for a longer period of time – hardly a scenario for a long term bull market.
Thus, investors should stay away from this market until a pullback confirms that the trend has actually changed to up. Traders should go with market momentum which is UP. They should be prepared to take profits at the first signs of resistance, which may happen tomorrow after an expected gap up.

Waiting for the Parliament Vote

The Nifty finished another day with big gains, making it three in a row. The Index is at 4159.50 within strking distance of the previous pivot high made at 4200.
If the Nifty closes above 4200, it will make a pattern of higher highs. This will break the bearish pattern of lower highs being made since April. Once a pattern of higher highs is confirmed, Intermediate traders (These are investors who may wish to take trading positions for a few days to a few weeks) can choose any one of the two options: They can start buying / investing now, or they can wait for a correction and then enter the market once it is evident that the correction will stop above the last low made at 3800. (This means a pattern of higher lows is confirmed).
There is no ‘right’ way. Early entry gives an advantage if the up trend continues. Waiting for a correction is safer since the trader / investor avoids the prospects of a false breakout. IThis is a decision that the trader has to make.
A numbr of individual stocks have made bullish patterns, mainly bullish head and shoulders in their charts. This does suggest that stocks are going through a bottoming out process.
We assume that we remain in a bear market. If the Nifty goes above 4200, the intermediate trend will change to up, but the primary trend will remain down.

This is the second blog entry for Monday evening. Scroll down to read the first – ‘Banks lose Money, Markets are up, What’s Next’.