Correction or More?

So far, the Nifty has shown itself to be in some kind of a correction. After a 1000 point rally, the Index was likely to correct, our question was: when will it correct? Therefore, the current dip should not come as a surprise. The sharp decline is certainly unusual, but then markets will not oblige us all the time.

When will this analysis go wrong? First, when the Nifty closes lower than 5937 and then remains below this support, consistently. Once we realize that the market has not held on to 5937 support, we should assume that a deeper correction lies ahead. The next zone of support is the 5200 – 5400 consolidaiton which lasted for four months in mid 2010.

Assuming that 5937 does hold, what lies ahead? I assume that we will see a period of consolidation. We should remember that the months of December and Janaury are usually up, so the seasonal factor favors the bulls.

Why worry? The only cause for worry comes when traders are over-leveraged. You should worry about the ill effects of leverage even in normal times. Keep your exposure to a sleeping level, and you will find that up or down, you will enjoy being part of the market.

Finally, one reason for this exaggerated decline may well be TV. I think the channel begins to highlight the declines as if it is the end of the world. As we know, it is just a dip. Nothing much.

Have Fun!

Nifty Chart Checkup

Thanks to a holiday, we can take some time to look in detail at the end of day Nifty chart. Here is chart with my notes coming in after.
This is a candlesticks chart for Nifty, end of day. Three moving averages are applied to prices, 20 day, 50 day and 200 day. The moving average lines are marked, so readers should be able to identify them. Have a look at the current position of each of these averages before you read on.

Prices have cut through the 20 MA, and yesterday also through the 50 MA. The long term trend, as represented by the 200 day average is UP – the average is rising, as also, prices remain well above the average.

The bearish crossover of prices below 50 MA is disturbing since it usually signals the start of an intermediate down trend. There are 2 reasons why we are not calling for a downtrend – First, sometimes the 50 MA acts as support and prices bounce back. Note a similar support in late August. Second, the crossover has come about in a strong support area. Therefore, the breakdown of support will be a clearer signal than this crossover.

How do we know that support is holding? You need a bullish candle! This will be the first sign that some kind of support has emerged in the 5900-5950 area.

What happens if support breaks? A close below 5900 approx will be a sign. Traders should not have any long positions, if they sense a breakdown since the next support comes much lower at 5300 – 5500. Note the gap between 5500 and 5900 – nothing in between!

Reader comments are welcome.

Early Morning View

Overnight, markets have not been kind. The S&P has given up all its intraday gains to close lower. Asia is flat, while the SGX Nifty (at 7:11 AM) suggests a slightly lower start.

The intermediate trend remains up. This trend wil change to down if the Nifty were to close below 5937 – the previous intermediate low. The minor trend is down, but may have bottomed out yesterday when the Nifty went below Friday’s low, and bounced back. It was a successful test of 6050 approx.

For Day Traders in the Nifty, the early morning view does not indicate any kind of trending day. Traders can use the Daily Pivot to determine the day’s bias. For Tuesday, the DP is 6096. This number can be considered as the dividing line between bulls and bears for the day. A second method is to remain with the intermediate trend, which is up. Then, wait patiently for an intra day sell off. Watch your momentum indicators. When you get a buy after the sell-off, go ahead and take a long position.

It is wise to determine a strategy before the market opens.

What about the longer term?
The Trading Range that developed in the 5100 – 5400 area has now become significant support. So far the Nifty remains above this support band, we are in a bull market. Within this bull market, there will be sharp corrections, pullbacks and the dream rallies.