Thursday, June 5, 2008

Rally in a Bear Market

The Nifty rallied today, to close at 4677, higher by almost a 100 points. But before this rally, in early morning weakness the index had fallen to 4536 almost touching the march lows of 4450. A fair question is: Was today's decline a test of the march lows, and, does the subsequent rally indicate that the test was successful ?
One day's bounce back should not be taken as a successful test of an earlier low. It may well be, but we will cannot be sure until there is confirmation. This confirmation comes when the Index makes a pattern of higher lows, or, moves into a consolidation (base building). Given today's big rally in the Dow also, we may be seeing a V shaped recovery in the markets with another up day tomorrow. This up move should be taken as a rally in a bear market unless proved otherwise.

For day traders, today's dip to 4536 was in fact a test of yesterday's lows. The test was successful, with an excellent buying opportunity coming in after the Nifty begain a rally from 4536. This rally took the Nifty up by a 100 points before it went into a consolidation. What may be an uncertain event on the daily chart was a successful test on a lower time frame, with a profitable trade.