Should we trust this Breakout.

The underlying theme in many comments by experts and novices is: The Nifty did break out above 4740 today, but can we trust this breakout?

Now, there can be many reasons for saying that the breakout from this four month trading range may well be false. Yet, the only way to find out if the breakout is genuine is to wait for the follow through. If the Nifty holds support then this is genuine, if it breaks down then the breakout was false. There may also be some early warning methods but the only sure way is to wait and find out! But this may not be a good idea since by the time we realize that this is a genuine breakout, the Nifty could be well over 5000.

My point is: The point of any breakout is the point of maximum risk. If the breakout is false then you have bought at the highest point in the move. There are two ways of trading a breakout – (1) Buy at the point of breakout (2) Buy on a pullback after the initial breakout. Both methods are correct. Traders may use one or a mix of both methods.

The width of the trading range was 400 points – 4350 to 4750. Thus, a possible target is 5150 for the Nifty. Will this be achieved? Again, we cannot say. But, until proved otherwise, we will go with the breakout.
Cheers.

Have the bears stopped selling?

Shazia makes some points.
“On cnbc tv you said that if nifty crossed the 4760 mark then it may well be on its way to form another bubble, why ?”

My Notes: The 4740 – 4760 zone has acted as resistance during the current rangeing market. This is also the level where the larger picture cup & handle or inverted h&s pattern is confirmed. Therefore with so much compression in prices just before 4760, a big expansion in prices may come if 4760 is broken. prices may continue going higher beciase (a) everyone else is buying, and, (b) ‘Liquidity’. That’s how bubbles are made.

Again in comments today:
“The nifty is now more squeezed in a narrow range having almost the same top but ascending bottoms. Technically it looks like the bulls havent given up buying but the bears have given up selling beyond 4750, which is why there is no short squeeze to pull the markets up.”

My Notes: These are usually the reasons for the market remaining in a range, which is what it is doing now. Bulls buy at support, and, either bears sell at resistance, or as you suggest, bulls themselves get out at resistance, while bears stay away. With the anbsence of bears, the bulls will have to get enough confidence to push the markets up. This could lead to a significant rally, because first the bulls will push prices, while intiially at least the bears may remain on the sidelines.

My grateful thanks to Student of the Markets for his kind words and sensible advice. Given here:
“today being the teacher’s day, I want to express my deepest respect to you who has taught me so much in trading. The most important things I have learned from you are – Market is bigger than any analysis ( including yours! ) ; The trend is intact until it is broken ( i.e. do not anticipate end of a trend); Focus on following a disciplined strategy rather than focusing on making the correct call as that is what works in trading.”