I have written many times in the blog on the repeating cycles of expansion and contraction. We have now seen a classic example. The Nifty was rangebound for many days, suggesting (to me!) that it was in a consolidation prior to a resumption of the original up trend. As it turned out, The eventual breakdown was to the downside.
How did we trade: My perceptions were not important. The pattern was a contraction and an expansion should be expected once the market decides on the next step. We were short on Wednesday around 5220 when the Nifty begain its downward drift. At that point, the Nifty support was assumed at 5200 with resistance at 5300, and this I had explained on wedenesday afternoon show on CNBC also. Our trading is mainly (100%) mechanical, therefore 2 short positions were taken.(two means two times normal were taken in anticipation of a breakdown from 5200 - this part, position sizing is our discretion). 25% of the position was closed at 5150 and balance 75% at 5100. We were also short in the Bank Nifty from Tuesday and, that position was closed in one go on thursday 3 PM.
Why did we close our positions? The short trades are against the intermediate trend (which is UP, so far) therefore require exits on range expansion in our favor.
Lessons learnt. The Market has its own mind. What I perceive about the market is irrelevant. The basic theme is: contraction leads to expansion, direction of move is unknown.
What can the Nifty do now? On its downward move, there is support at every decline. We have touched the 5080 support, then we are lookng at 5000 , then at 4940. A base, at least on intra day charts is required to justify buying.