Wednesday, July 16, 2008

Market Ends Dull Day with a Whimper

True to its trend (down), the Nifty closed lower, below the 3850 level that was considered to be support. Yet, trading was dull, with the Nifty moving in both directions in choppy movements.
As the Index touches 3800, down almost 600 points from a minor high at 4400, market participants may be tiring of the sustained down move with choppiness in between. The result could then be at least a short term bounce. This bounce could get momentum IF the ruling Congress party wins the vote of confidence scheduled on July 22. On the other hand, if the ruling party is defeated we may well see panic like situation resulting in the free fall that should happen once 3800 is broken again. I have decsribed just one possible scenario. There are too many possibilities, including sudden declines in international markets, a sudden spurt in crude prices, increased inflation numbers due to be released on Friday, and so on.....
So, how does the trader position herself ? Today's market action - declines with a narrow range suggested that the bears may be willing to take some rest. With strong chances of a relief rally, the trader may like to close short positions, take a small long position. The short positions should be re-established if the Nifty were to close below 3800. Traders may consider using options to create their positions.
Ideally, traders should have well defined rules to take trading positions. I have outlined a scenario if you do not have such rules.