Wednesday, August 20, 2008

August 20: What lies Ahead

We will have a look at the possible market action in the coming days. It is sensible to move away from day to day trading and have a view of a slightly larger time frame. Given below is a daily chart for the Nifty with cycle adjusted stochastics. I have used a period of 51 days for %K.

The stochastics seems to have reached an area where resistance was faced on earlier occassions. It is reasonable to expect that the Nifty is likely to face resistance again, with the possibility of a consolidation or a decline. Also note that during the Sept - December 2007 period, this indicator stayed in the resistance zone for three months, but there was no correction or dip. This is the nature of momentum indicators. They will correctly forecast tops and bottoms when markets are range bound, but fail when markets are trending.

We have to ask ourselves: what is the condition of the market now ? If it is trending then the indicator will have little or no forecasting value. The answer is: markets are in a range. Then, we should expect the indicator to catch tops and bottoms. Again, there is no assurance, that is why the trader uses proper money management to protect himself.

To return to the main point: the outlook now seems to be that the Market will be facing resistance at higher levels with a strong chance of a consoldation or a dip.

Can this analysis be wrong ? Sure. Why not ?

What actionable ideas do we get from this analysis ?

Open you charts expecting more downside momentum. If you get a buy signal, take it since we could be wrong, but, trade with lower volume, keep tighter stops, plan for profit targets. if you get a sell signal, trade with normal volumes, keep stops a little wider, plan for bigger moves.

1 comment:

Praveen Shamain said...

Dear Sir,

I am curious to know the reason(s) behind choosing 51 days for %K in stochastic indicator.

I mean, did you experiment with this number and got the desired result or does any theory suggest this number.

I have been using 5 and 14 for %K.

Please let me know your views.

Thanks in advance.

With Regards,