Wednesday, July 23, 2008

Follow the Momentum

Five days of back to back gains in the Nifty tells us one significant fact: the markets truly discount the future. Only the collective wisdom of the market could foresee in advance the victory of the govt in the confidence vote, or the rally in international markets.
What this tells us is: Technical Analysis is the sensible method of trading the markets since TA follows the markets rather than predict it.
The minor trend has been up since last week. The intermediate trend is up since yesterday. We should be looking at 4600, which is a pattern target suggested when the Nifty broke out from 4200 resistance.
What Next ?
Traders must always go with momentum. The momentum is with the bulls, so we buy - buy on dips & buy on breakouts. This should be easy to implement. But, in reality it is difficult to do so. We are filled with the impulse to go short - thinking , it has gone up so much, how can it go any higher. Well, we all know that markets can move much further than we reasonably expect them to. It is not our task to dictate to the market. Our job is to follow the market.
This still does not answer the question: what's next ?
Well, as a trader, I am going with the momentum. In case you are confused, the momentum is UP.
As an analyst (traders make money, analysts do analysis.) my sense is that the current up move is a bear market rally. Bull markets do not start with V shaped reversals. Again, we do have sharp sudden rallies in a bear market, which is what we are seeing now. Then, at some point, the rally will face resistance, eventually see distribution, then a slow decline, then a much faster decline.
My analysis is used for my investments. My trading is purely on momentum & short term trend.
Thus, as an investor, I will wait for a correction. If the correction holds, stays above the earlier lows, then I will begin new investments.