Sunday, July 20, 2008

Fool's Rally or a New Bull Market ?

A two day rally in the Market saw the Nifty move up from 3800 to 4100, a handsome 7% gain in just two trading sessions.
It appears that at least a short term low has been made at 3800. The short term trend (wich traders should follow) is UP.
But, Investors should stay away from the market. Such rallies will come again and again in an ongoing bear market. The Bear is very much alive and kicking.
Why do I say this ?
Let us examine past history to determine how a bear market should end. While we can review many examples from world markets, we will confine oursleves to bear markets seen in India.
The 1992 bull market saw its final lows about 15 months later in 1993. The 2000 bull market saw its final lows, almost three years later in 2003.
With the top of the bull market made in 2008 January, the earliest, we should expect a bear market bottom will be 15 months later, around April 2009. Strange, but this also coincides with the Q4 results for 2008-2009 and maybe, a general election.
If the bear market is an extended one, we could go all the way for three more years, finally bottoming out somewhere in 2011.
Now, these may well be the outer limits (minimum and maximum) with the market finally bottoming out anywhere it wishes. If we assume that the bear market has finished at 3800 now, then we are looking at just a six month bear market. Given past evidence not just in India, but the world over, it does appear that a six month bear market is probably not likely to happen.

How should you trade the current two day rally ?
A 7 per cent upthrust is certainly a short term uptrend. Day traders and Swing traders should already be long. (My previous blog entries had suggested this - scroll down to read them.) Dips can be used to initiate fresh long positions. A Nifty below 4000 will be a sign that the rally is fizzling out. These levels will change over time.
As an Investor, just stay away.
Investors must follow the primary trend of the market. This trend is down. The Market must (a) Make higher highs by closing above 4200 for at least three days, then (b) remain above 3800 when there is a pullback -( a dip).
After these two conditions are satisfied, there will be a sign that at least an intermediate up trend has started. That will be the time to invest. Read this blog daily to get updated on the markets!
Trading on News Days:
July 21 & July 22 are news based days, when the confidence motion will be debated, then finally voted on. Day Traders and Swing traders should avoid trading to such days since rumors and news can cause sharp spikes of voaltility which can cause lot of financial damage.
I hope to add more blog entries by Sunday evening, so keep coming back.