Thursday, October 23, 2008

Morning After the Dow is minus 500

I write this at 6:58 AM, with the Nikkei down by 626 points at 8048. Anyone who saw the Nikkei at 10,000 (falling from 18,000) may have thought : The Nikkei has fallen so much. How much lower can it go ? The answer is for us to see. The Nikkei has fallen 20% in the last few days from 10,000 to 8000.

The same reasoning should be applied to the Nifty. The Singapore SGX Nifty should open a 100 points lower, somewhere around 2950. So, we should ask ourselves: how low can it get for the Nifty ? The Nifty could reach 2000. After all, we have seen the index fall 1000 points in the last 25 days. So, what is another 1000 points in the next few months ?

How about some more doomsday predictions. Below 2000, support comes in at 1600, then 1200. Can the Nifty fall to 1200 as the world enters the 'mother of all bear markets' ?

Quick update, at 7:04 I check the SGX Nifty. It shows 2880, so my estimate of 2950 was optimistic.

Now, momentum is clearly down, but the world is not coming to an end.
Markets can become irrational for long periods of time. We see this happen every time during the last phases of the bull market. Surely, the bear market will also see irrational moves to the downside. I think, this may be happeneing, now, in many countries including India.

The issue with bear markets is what happens after these irrational moves. The market usually begins a base building pattern which lasts for several months. Therefore, much as I like to go out and buy, these 'bargains' may come at even lower prices. In any case, even if a low is being made now, there will be a period of consolidation which will be the right time to buy. No hurry.

For day traders, go with momentum, do not try to buy.


tushar said...

I think today's gap down cannot be shorted like yesterdays.

stmittal said...

In response to your doomsday(!!!) predictions --- There is an element of Elliott Wave Theory which attempts to answer the low of a bear market. Theory says that the correction to a wave 3 should end in the range of wave 4 of 1 lesser degree. This wave 4 range was 3774.15 - 2595.65. Thus, it is possible that our own nifty may not go below 2595.65. This theory seems to have worked over the last century on Dow Jones data. It remains to be seen whether this theory will hold this time for our own markets. If it doesn't, your doomsday like predictions are welcome for us traders anyway. :-)

Saurabh Mittal

Jatin Soni said...

Thank you sir for enlightening abt Fibonacci numbers. I also try to trade nifty from your opening range breakout strategy , its very effective. I found it useful when nifty is in a strong trend. But some times it whipsaws me.can u elaborate more abt this strategy, when this strategy works well and when it doesnt??