Thursday, August 27, 2009

Signs of contraction

The Nifty moved up about 350 points before starting to pause near the 4700 resistance zone. For past two days, the Index has been in some kind of narrow range. I think of this narrow range as contraction.
Markets go through cycles of expansion and contraction. We saw the expansion when the Nifty made bullish bars, moving up from 4350. Now, we are probably in the contraction part of the momentum cycle. Yesterday, was an NR7 - the narrowest range in 7 days. Today's price action was also confined to a narrow range. Now, the contraction may last for a few more days or may quickly moe on to a big directional moe which will be the 'expansion' segment. Traders who are able to catch this big move, as and when it comes, will be able to enjoy a low risk, high probability trade.

It is not neccessary to determine the direction of the coming breakout. It is important to determine the boundaries within which prices remain in contraction. Any move out of these boundaries will be the first sign of expansion - the big move.

2 comments:

Vinod Dhandapani said...

Dear Mr. Sukhani,

Is the pattern in Sun Pharma a Symmetrical Triangle? If yes how will you trade it now. It looks like a breakout is on the cards.
what is the target.

Thanks
Vinod D

Shazia said...

How to determine the boundaries within the contraction? The first breakout apparently looks on the upside.. 4730 was the upper boundary which was broken on friday.

thanks
shazia