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Volatile conditions continued in world markets including India. The Nifty opened almost 130 points lower, then staged a decent rally to recover all its losses and close absolutely unchanged. As I write, the European markets are down almost three percent. In that respect, the Nifty is certainly outperforming the rest of the world. For how long ?
My Analysis
The Index has broken down from a trading range that lasted almost eight weeks. Such breakdowns / braeakouts have a lot of significance. The market is giving a message: After many weeks of confusion, one side has won the tug of war.
In this case it is the people who think that share prices continue to be high and will move lower. Like today, we will see many intra day rallies, but the net result will still be a market decline. At least that is what we should expect. The markets can always surprise us, by doing something different. That’s fine.
The Million Rupee Question:
How should we trade this market ? This is a fair question. I hope to provide my answers over the next few days.
From www.expressindia.com:
ADB lowers India’s growth forecast to 7.4%
Prompted by ongoing global financial turmoil and weakened investment outlook, the Asian Development Bank on Tuesday lowered India’s economic growth forecast for the current financial year (2008-09) to 7.4 per cent from earlier projection of 8 per cent.
My Notes: This is not good news. The market may take its time digesting this piece of information. Now this is disturbing in many ways.
First, in the growth pie, the rich make the maximum claims. Whatever is left is given to the middle class and the poor. This is the trickle down theory, ably practiced for past few years. (give the rich, maybe something will trickle down to the others). Thus, a slow down in growth will affect the needy much more than it will affect the few hundred thousand rich in india.
Second, slowing of growth is likely to have an adverse affect on the stock market, sooner or later.
Morning Views: What lies beyond 3800 ?
The morning is not good for the bulls. The Dow is down 500 points, while AIG – the large US insurance group has been downgraded, requiring more funds which they may not have.
Let us go through some scenarios.
First, the Nifty continues to fall, touches 3800 or whereabouts, then finds support. It builds a base here.
Second, the Nifty rallies before it touches 3800, goes back into the trading range.
Third, the Nifty continues to drift down, then breaks 3800 decisively, trading lower. This is the scenario we are discussing here.
If 3800 is broken, the Nifty finds support at two different levels, 3650 and 2700 where minor support exist. Strong support comes at 2000. Now I do not believe that the Nifty will fall to 2000. This is not my suggestion. My point is: charts will not provide any technical support below 3800. There is a free fall, the Nifty can stop wherever it wants. We do have 3610 which is also the 50% retracement of the bull market that started in 2003. Then, we may be looking at the Nifty finding support around 3600. This is the best case scenario if 3800 gets broken. The worst case scenario is that these minor support numbers do not hold, the Nifty begins what may be a free fall.
The purpose of such scenario building is to face reality. If we are mentally prepared for a situation we can adapt to changing circumstances. We can go with market flow instead of fighting the market.