Are we near a short term low ?

One of the questions traders must be asking on Wednesday afternoon must be: Has the decline been overdone? A natural corollary to this question is: Are we near a short term low?

Let us try to answer the first question.

A 9% decline in the Nifty in as many days has been seen before. I suspect, it will be seen in the future also. Therefore, while the decline is painful (for bulls) it needs to be accepted for what it is. There is no measure of how much is acceptable and how much is overdone. If analysts say that 200 point decline is acceptable, then does this mean that the market has to fall 200 points and then suddenly stop falling. It is not so. The markets do what they will do.

What does overdone mean? Does this imply that the sharp 9% decline was overdone, and, the market should stop falling for a few days then again resume its decline? In such a case why would a trader buy because a decline is coming anyway!

My point is: a market does not work in clockwork, predictable pattern. Traders have to adjust their trding decisions to what the market is doing.

The second question: Are we near a short term low? This is best answered by the Market itself. The first signal that the market is making at least a short term low will be: The low of the previous day holds.

If you are short: use intraday charts to keep your trailing stops on full or part of your positions. For example: on 60 minute charts, use a three bar or five bar high as a stop.

If you are flat: You will be looking for trading opportunities. After a steep decline, the opportunities will be: try to catch a corective up move or wait for a relief rally and go short.

Have Fun!