What the world is doing on Thursday, March 8

The public choice of higher French tax rates in which Hollande, French presidential candidate proposes a maximum tax rate of 75% on incomes above one million Euros (about Six crore rupees). The public seems to support him. There will be about 3000 people in France who have such incomes, of which 120 to 150 are footballers.

Silver may be topping out, also suggesting that markets are vulnerable. A detailed analysis of the relationship between Silver, world events and equity prices suggests that Silver may have made a short term top and so have equity markets.

Robert Shiller says this might be the end game in U.S. housing prices. Shiller, who called the top in American housing, now says that the market may be bottoming out. U.S. housing has been a big contributor to the economy, so this is probably good news for the markets.

Return of the Bear in which blogger Jeff Carter wonders if the recent rally was a bull move in a longer bear market. He seems to think it was.

The Nature of Corrections

The Nifty remains in an uptrend – I believe it is in the beginning stages of a bull market. Like all market cycles, there will be corrections, dips in the ongoing up move.

Now, markets are not made to order. We cannot order a correction that suits us. What we know is that all markets correct. The current decline in the Nifty is part of a correction, that is part of the natural cycle of optimism(exuberance) and pessimism.

Yesterday, just before markets closed, Udayan asked me on CNBC, “have you taken any long positions?”. I explained that since we are in a bull market, after a sharp decline I have just taken some long positions, and, if the markets open lower the next day, I will close the positions immediately.

There is a reason why Udayan is the star of all market anchors. He understands the markets – that much is obvious, but he also understands how each of his analysts thinks, trades and behaves. My view has been consistent – we are in a strong uptrend. If this is so, then Udayan correctly surmised that I may well be looking to go long.

My description of yesterday’s conversation and the thinking behind it was to explain the nature of corrections. I  think readers are now smart enough to get the meaning.

Cheers.

Markets in consolidation

After a blistering rally that took the Nifty up by more than twenty percent, markets are in a stage of consolidation. While there is logical support at 5400, it is for the market to decide where support will come, finally.

A more important question is: is this a bull market? The answer is based on market behavior so far - prices above 200 day ma, pattern of higher highs, higher lows, and, gains of more than 20% from its lows. Therefore, based on this evidence, I aasume that the current decline is a correction / consolidation in a newly born bull market.

Even as we are bullish, short term traders should buy only when the trend changes to up. The signals will come on short term time frames.

An interesting piece of news is about the sesa goa - sterlite merger. While there are many reasons to justify this action, I am not a fan of financial engineering as a means of value addition. It is hard work that adds value, not investment bankers.

Start of a Correction

Today’s sharp decline in the Nifty saw the Index move below 5545. The 5545 level was an earlier swing low on shorter time frames. When the market breaks below a swing point (high or low), it is giving a message. When lows are broken, the charts begin a process of lower lows, and, eventually, lower highs. This is not bullish.

Therefore, once 5545 was taken out, all short term positions should be closed. Aggressive traders should take short positions.

What may have began is a correction of the up move. At this point, it is difficult to say the extent of the decline. Much easier is to identify the support levels – 5400.

Corrections are counter trend movements, therefore, they are difficult to trade. Short term traders should go with the flow, it is on the downside, but have modest expectations since these declines can be mixed with choppy movements.

Nifty gains twenty two percent in 55 days

There are many definitions of a bull market. Some of the more commonly used are:

1. A bull market exists when the close is above its 200 day simple moving average.

2. A bull market is confirmed when prices move up 20 percent higher than the lowest low of the bear market.

3. The Dow Theory says that a bull market signal is received when prices go above rhe high of the previous intermediate top.

For the Nifty, all three of the rules have been fulfilled. The Index is trading well above its 200 day moving average. Prices are more than 20% higher than the lowest low recorded at 4530, and, we have seen a pattern of higher intermediate levels when the Nifty crossed above 5400.

Then, we are in a bull market. Our bullish stance however started when the Nifty crossed 4630 and has continued ever since. We did not wait for a thousand point rally to go long. One reason is that our view is based on momentum - since momentum continued to be favorable to the bulls, we remained bullish.

There will come a time when momentum will slacken, then it may actually turn negative. What will be our stance then? We will assume we continue in a bull market, unless proved otherwise. Any counter trend moves will be just that - against the trend.