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.

Wednesday, March 25, 2009

Breakout on Nifty - Buy on pull backs

Nifty Daily Chart with Stochastics and MACD. Price pulls back from triangle resistance line.

As is amply clear from the chart, Nifty pulled back after touching the downward sloping resistance line which is the upper line of the former triangle. We know look to buy near the 100 DMA at 2830-2860, the area from which price broke out on Monday.

Go through the post below. What will become clear to anyone is that there were a number of resistances in the 2800-2850 region - 50 & 100 day moving averages, 0.618 retracement of the earlier downmove, an upward sloping support turned resistance, a falling wedge and also another falling trendline resistance. Despite these numerous support, and despite the market itself being overbought with stochastics well above 85 levels, price broke through the barriers convincingly with a 5% upmove on Monday.

Intraday action as marked on the 5 day chart below with stochastics & rsi remaining oversold throughout the day and price moving up through the session without any major dip suggest major short covering and further strength in the days to come.

In the meantime though price might see a breather and corrective action over the remainder of this week as markets worldwide are overbought, having seen a near 20% rally since the low in early March. Stochastics is about to make a bearish crossover,and price might close inside the bolinger bands today after having spent 2 days above the top line, giving a sell signal, but thats fine. The underlying trend is bullish & would like to create bullish positions on dip. If one has to go bearish it has to be with small trade size and strict stops.

I would look to buy in the 2830-2860 region over the coming few days. 100 dma is at 2827 as of today. If and when price corrects to that level we shall again watch if its able to overtake resistance at the top end of the triangle. If its able to take that out successfully, then we have a free run till the 200 day moving average, yes... all the way upto 3500 :)

Wednesday, March 18, 2009

Nifty - Facing resistance after strong rally

After a pretty decent (around 10%) rally over the course of last 4 sessions, markets today finally corrected a bit after facing multiple resistance around the 2800 area and on profit booking. Such action is expected, after such large rallies, price action needs to take a breather before it can start moving up again. So when price action faces resistance after such large upmoves, they are bound to give up some bit of the gains. People who went long look to book profits. Shorts who were waiting to enter find themselves with good levels again to go out & short and resistances offer them good risk-reward ratio.

First & foremost resistance was from the previous triangle from which price broke down a few weeks back. Look at the chart above.
The former support line of the triangle was now expected to act as resistance which it has. This is typical of such patterns, supports turn into resistances once on break of that support.

Next resistance was in the form of the 50 day moving average at around 2808 for the day. Nifty made a high of 2805.6 for the day, just touching the 50DMA (blue line in the chart above) and corrected downwards.

The third one came from this bearish wedge formation on the intraday charts (chart below). This is the 5 day intraday chart of Nifty spot.We can see a wedge being formed since Thursday 12th march. Such upward sloping wedges, also called bearish wedges, generally break on the downside. This is what we saw on today. Markets initially rallied to 2800 levels, where it faced multiple resistance. Then it gave back the gains, broke below the bottom support line and then fell a bit more.

And lastly we also had a fibonaci resistance from the 0.618 retracement of the down move from 2969-2539 at 2805.

But where do we go from here ?

Look at the first chart again. The MACD indicator at the bottom has just made a positive crossover & thus a bullish indication to go long. Stochastics too has emerged from oversold territory with a buy signal & RSI is positive and rising. More than the RSI & the stochastics, MACD gives more reliable signals. It doesnt mean that markets will definately go up, but the probability is good that it will, and that the rally may continue for a few more weeks. I also trade currencies, and from there too, the indication seems that this rally might have more steam left to go.

So then what do we do? We buy on dips. The dip just started today, should have further room on the downside, before it makes an attempt at crossing these resistances again. With such heavy resistances it might take a lot of effort to clear all the resistances and we see a decent down move. 100 DMA also looms at 2845 as a resistance.

Price should fall atleast till 2705 (.382 retracement of the 2545-2805 move), more likely even upto 2675 (50% retracement).
10 day moving average stands at around 2660 and the 20 day MA at 2725. So I would wait to re-enter between 2675-2705. Price should ideally keep above both the 10DMA as well as the 50% retracement for the bullish case.