Cycles of contraction and expansion.

If there is one living truth in the market, it is that markets go through cycles of contraction and expansion. The cycles are not perfect, in the sense that we cannot always say when contraction ends and expansion begins. But, however imperfect, these cycles exist.

This is useful knowledge. When we encounter contraction, we can be as certain as anyone can be, that expansion is coming soon. This is what happened with the Nifty. The Index was in a tight range throughout the day, finally moving up 55 points in just 90 minutes. The Index was also in a tight range for 10 days, which broke out on the upside today.

Traders should keep the contraction-expansion setup as part of their trading tools.

Gourav writes “.Even some one like you just before the break out in CNBC told “Now I am looking for the breakdown below 5050″.”

My Notes: This is slightly incorrect. I had a 1.20 PM interview with Mitali. This is not my normal time slot, it was a special appearance. I said that the Nifty is in a very narrow range and now we are open to taking short positions if the Index breaks 5040 support. So far, the view was that we will take only long positions since the trend is up, but today mid-day, looking at the narrow range persisting, we thought that we will let the market tell us what to do. Therefore, any breakdown would tell us to take short positions.

Seriously, is the world coming to an end?

Seriously. Is it?

Will the Greeks – the birth place of civilization – complete the circle by putting an end to civilization as we know it. And how will they do this? By refusing to retire at 60 instead of 55. Or, by saying that 35% marginal income tax is not acceptable.

Maybe it will be Spain or Italy that will cause the end of the world. Spanish bond yields can go up to 7.78% causing this world to come to an end.

And then again, maybe the doomsday proponents will go wrong, as they have done in the past.

A very big difference between past crises and the current ongoing problem is – democracy. A government of the people has inbuilt checks and balances. Some times markets may not like what the Government does, but eventually the interests of the markets and the country will coincide. If the country prospers, markets will prosper.

My point is: A crisis will result in a bear market. We saw that in 2008 during the sub prime crisis. Are we going through such a crisis now? My answer would be: No.

If the environment is not bearish, then we revert back to the normal market cycles of accumulation, rally, distribution and decline. My sense is: we are in the accumulation phase.

Look at any number of charts which are building bases, bullish reversal patterns. There is a message by Mr Market – I am going up.