Tuesday, March 31, 2009

Short term trend turns down, markets to slowly head lower


nifty daily1 31.03.09


nifty daily 2

Since the 2250 intraday bottom in October 2008, Nifty has been moving in a very broad range with the lower end being 2500-2550 where support has come in for Nifty and market has bounced up strongly from there thrice now. It could also be probable that the market has formed a bottom in October and hence moved up from there. If its able to move up conclusively beyond 3100, it would mean we would have seen a triple bottom technical pattern formation in place. Such a formation happens when price bounce off a support area and then are able to move above the intermediate highs between the two/three lows conclusively.

Anyways, that is the intermediate trend. But currently we are talking about the short term trend. The trend has turned negative after yesterday’s down move.  Short positions can now be attempted.

Why is this place a good time to take shorts? Because we’ve seen a very strong up move in the last two three weeks, with global markets having rallied more than 20% in such a short span of time. Markets don’t move up forever, and it is time to give back some of those gains. After such strong moves, when price meets strong resistance, it will not be able to overcome it easily. We wait for price action to confirm the resistance. We got that yesterday. The message was clear, index faced selling at key resistance area and moved sharply lower.

Today it has rallied a bit and is near 3030, and we can take short positions here because

a. We have resistance area defined & price action confirms the same

b. We have good risk reward. Our stops have been defined by the resistance line. We would close the trade if price closed above the resistance line. Our targets similarly are also sort of defined. Could be any of the following -

1. Fibonacci retracement level of .382 come in at 2910-15

2. 100 day moving average at around 2850

Thus for a potential loss of around 100 points we have potential gains of 120-180 points. Not very great, but decent. It could also be the case that this whole up move itself  has ended at 3100, with the kind of bullish sentiment that has suddenly emerged in the past week. Suddenly you have analysts talking of 3500-3600 which couldn't have been imagined even a week back.

That tells you that there is much more scope to the downside. There are many longs and correction will trigger many stops and force people to exit. My view would still be that the we have a pretty good chance that we will eventually see a break above 3100 which will lead us all the way to 3500-3600. But that’s for later. For now, we take shorts & wait patiently for market to give up some of the large gains of last few weeks.