Today's market was a remarkable lesson in humility. The nifty went up above yesterday's high and then almost like a sudden cloudburst prices started falling, eventually going through yesterday's low. That means that the market today first crossed yesterday's high and signalled a new uptrend, then reversed back to give up all its intraday gains and then actually move lower than yesterday's low to signal a new down move. When an inside day is formed, the next day's market will either go up above the high or go below the low. Very rarely do they move above and below both levels, as they they did today.
I think what we're seeing today is probably a minor correction of the ongoing up move. What we may see now is a market that actually remains sideways for a few more days.
Despite the sharp decline that we saw today from intraday highs, the trend remains up. Therefore, traders should wait patiently for this small correction to end and then search for opportunities to go long. Obviously, then comes the question: what if this analysis is wrong?
The first question is: how will we know when the correction is over? The answer to this is: when we get a bullish daily bar. That will be the first signal that the correction which started today is complete.
The second question is: what happens if the correction actually turns out to be a new down move. The answer to this one is more difficult. Traders have to identify the ongoing trend. This will be done differently by each trader. Suppose you are using a eight period moving average to identify the short-term trend. In this case you will turn bearish when the moving average turns bearish.
The third question is: at what point does the trader give up the uptrend? This question is related to the earlier one. But here we can also use some chart levels. I would feel that there are uptrend is intact while the nifty trade above 4250.
Finally, the most difficult question: how do you trade now? This is difficult to answer because the trend is up but we are seeing a correction. A correction is always difficult to trade. while the market is in a correction trader who can switch to buying on dips and selling on rallies.