Sunday, August 3, 2008

Technical Analysis of the Indian Stock Market

Looking at the markets and trading in them every day, sometimes hides the bigger picture, as day to day fluctuations begin to influence our analysis.
So, today is an attempt to relook the chart for the Nifty which represents the Indian Market , without any preconceived bias.
A four and half year bull market is visible from a low of 920 in April 2003 to a high of 6350 in January 2008. From the January highs, the decline to 3800 in July is a bear market, in terms of points lost (2500 points) and percentage (46% retracement of the entire bull move, and 39% decline from the top - 2500 points of fall is 39% of 6350). The momentum of the decline, the breaking of repeated support levels, makes this decline a bear market.
So far so good. But, all of this is history. While technical analysis does not try to predict the future, it does try to say where the market is now. This is significant information, since if the analysis suggests that the market is in an up trend, then we should buy, and so on....
The last leg of the decline from 5300 to 3800 was marked by lower highs and lower lows, with not even one correction moving above the previous high. This was a strong message that the market is weak.
This pattern has been broken, with a minor high at 4540 made on July 24, which was higher than two earlier minor highs, 4215 (July 11) and 4325 (June 26). We now have a pattern of higher highs. To begin an intermediate up trend, we require a second pattern - higher lows. On July 29, a sharp correction saw the Nifty make a low of 4159, and the index has since moved up to record higher levels. Thus, the 4159 low is now a minor low, higher than the earlier low at 3800. The pattern of higher highs and higher lows is complete.
The current chart pattern tells us that we are in an intermediate up trend. This uptrend stands cancelled if and when the Nifty closes below 4159. The level of 4159 will change over time.
We may well be in a primary bear market. If this is so, then at some point the intermediate uptrend will break down. But, traders should follow the intermediate trend, meaning that most of their trades should be in the direction of the intermediate trend.
It is also possible that the up trend may break down after a false rally, or even quicker, starting from Monday itself. In such cases, traders will face small losses. This is what is called a whipsaw. That's the way trading works.


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sharetipsinfo said...

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