Sunday, July 27, 2008

Nifty on a Watch

The Stock market as represented by the NSE50 (close:4318) has seen volatile movements over the past two weeks. First, we saw a decline to 3800, then support coming in at this decline. Smart Money probably sensed a political victory for the govt in the confidence vote. The Index was up almost 20% this week, before Friday's decline cooled down the gains to 15% from the 3800 lows.
Wise Traders follow the Markets
The markets go through three phases - up, down and sideways. When the market is changing from up / down to sideways, there is confusion since the trader is no longer confident about the current momentum. Then what should he follow ?
The primary trend is down, the Nifty is in a bear market.
The intermediate trend is UP. The trend changed to Up when the Nifty crossed above its previous minor high at 4215. This is the number we will watch for. A close below 4215 will change the trend to down.
The minor trend is also UP. This trend will change to down if the Nifty were to close below 4300. How did I get this number? The low on Friday was 4297 so I rounded this to 4300.
A trader should be following the minor trend. When the minor and intermediate trends are aligned together trading is easy, volumes can be increased.
If Monday opens below 4300, there will be a chance that the minor trend may change to down. Or, a strong open could suggest that 4300 may well be supported. If this happens, traders can buy on an intra day dip with 4300 as stop. There are many ways of trading this scenario. The key is to accept when you are wrong, keep protective stops to ensure that your losses are limited.
I have a software that provides projections in the near future. This software is suggesting a down swing with a target between 4290 and 4180. Now, the Nifty has already touched 4297 so it is anybody's guess on what the market could do now. I do not use such predictive tools since I prefer to use chart patterns that tell us what is happening now rather than the future. When such support levels are identified, a much wiser trade is to buy the support near 4180, and if the support breaks to sell the breakdown.
Earlier in this column, i had suggested that trading is not easy when markets lack direction. Now is such a situation. Trade less, with low volumes.

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