Saturday, September 12, 2009

Is this breakout going to make it?

I think the title of the post reflects the question which is uppermost in the minds of most readers.

The Nifty moved in a trading range, 4350 to 4750 and then broke out closing above 4750 for five successive days. The target for this breakout is 5150. Will the Nifty make it?

As usual, the first point is simple: The markets will do what they want. So, making learned comments on where this breakout will go does not matter at all. No matter what I write and analyze, the market will not do what I say.

Then, why should I even try to answer this question? Okay. I will not even try.

A more relevant question is: given a breakout from the trading range, how should traders setup their positions in the coming days. I will answer this one. Again this is my analysis, and, could easily go wrong.

1. I do not argue with breakouts. Price tells us that after remaining undecided for many days (trading range), it has come to a decision on the direction. The trend is UP.[additional notes: volume, long term trendlines may affect the actual outcome of this breakout. But we will know this affect much later when the breakout either succeeds (did not affect) or fails (did affect). In either case the information when it is finally received cannot be used for action now. So, I choose to let it be, just focus on the price.]

2. When will the breakout fail? A tight small range was made with a low around 4570. This is my level for a sign that the trend may actually be turning down. This is for the trend, not for stops.

3. For Swing traders, a pivot low was made at 4780 approx. So far the Nifty remains above this number, assume that the short term trend is up, buy on dips. A break below 4780 will only signal a short term downswing, which you may or may not like to trade because it will be a correction. But buying should then be avoided till a pivot low is made.

4. For day traders, there is always the desire to sell at the high of the day. My suggestion is: avoid this impulse, and, see 3 above. Buy on dips and on consolidations. You can use simple rules to determine if the market is likely to move down. Then of course, you do not buy.One way is to stay away if the Nifty is trading below the low of the first 15 minutes. Or, if the Nifty has made a big gap up. These are stay out of trouble ideas. If the Nifty remains below the low of the first 15 minutes, moves down then builds a base in intra day charts, that may well be a buying opportunity even as price is below the lows of 15 minutes. So always have an open mind.

It helps a lot when you are aware of the direction in which you want to trade.

5. For position traders who wish to buy stocks, remember that stocks have a momentum of their own. The trend in the Nifty (up) allows us to buy, but the individual stock chart should not be in an 'overbought' position. Buy on dips / after a consolidation.

I will try to answer questions in a later post. Have a good weekend!


sansiddhi said...

looks to be real breakout.

Shazia said...

Is there a time period also to be taken into account to determine if it is a real breakout or not? Since after the breakout we havent made much progress.

jagjit said...

Hello Sir,

* Please make an Elliot Wave Count for the Nifty or tell me a good link where i can get this information periodically(free of cost).

* What is your expected targets for the Nifty in the coming two weeks?

* Is it wise to still hold our stocks which are in really huge profits?

* I've some basic knowledge and experience of chart study, can you suggest me a good advance book on chart analysis? or some advice to improve my study.


Ravi said...

Dear Mr.Sudarshan,
Its been very nice reading your recent blogs. You've given us a very detailed account of how to look at the market in such unsure times. Thankyou for being available on tv18 with a lot of information and tips, it is really informative listening to your take on the stocks and the market.
As for my question... do you think hedging is a good idea, specially in a market like this. We've been holding hedged positions on the nifty to be able to minimize a loss and ride the unsureness present.

Again thank you, for the consistent & dedicated efforts, towards sharing your knowledge with the general masses.

Best Regards,
Ravi Chandra.

men said...

Mr. Sudarshan, what is the stance one should take on the market now that it has almost come to 4900? Thanks in advance.