Friday, August 26, 2011

Nifty at new lows for this bear market

The benchmark index has broken a minor technical level - 4800. As I write this, we are trading at 4780, below the 4800 psychological number. Significant technical support on the charts comes around 4650. Now, the mrkets will do what they want, so this decline does not have to reach 4650. My point is: Around 4650, we should become alert for signs of support.

What about risk reward for investors? This makes interesting reading now. Assume that the Nifty could touch the downside target of 4000. Buyers at current levels have a risk of 780 points. Suppose they hold on while the Index goes to 4000 and then starts a new bull market. Eventually, the Index could come back to 4780 and at some point of time cross 6350. So, the risk for investors is 780 points and the reward may be 1500 points. Added risk comes in form of time - we do not know how much time the process of going to 4000 and back to 6350 will take. Then again, niether of the two targets, 4000 or 6350 are actually assured. What do readers say?

5 comments:

amarjeet said...

sir,
please give example on chart how 4650 support level.

Shazia said...

This is something all of us must have on our minds(i think so coz people around me have been saying the same) and going by the risk reward ratio, most of us just might buy and think we can hold it till 4000 levels.
So supposing most of us do that.. Our stop loss would be just below 4000? If the market slips below 4000, there could also be huge unwinding of positions leading to further downside.... Seeing the risk reward most bears would have also not sold, so no covering to support markets either??
What am trying to say is if most of us think the same what could be the outcome??This is something all of us must have on our minds(i think so coz people around me have been saying the same) and going by the risk reward ratio, most of us just might buy and think we can hold it till 4000 levels.
So supposing most of us do that.. Our stop loss would be just below 4000? If the market slips below 4000, there could also be huge unwinding of positions leading to further downside.... Seeing the risk reward most bears would have also not sold, so no covering to support markets either??
What am trying to say is if most of us think the same what could be the outcome??

Balu said...

Sir

Just for imagination!! what if nifty trades in a range of 2250 and 6350 for a decade. Is it impossible? if election gap gets filled, then next etc etc..

Balu

PD said...

Dear Sudarshan,

Could you please explain how one should trade the global indices through NSE...The expiry date and contract months given in the NSE website is a bit confusing..

Thanks
Vinod D

Sasi Uppuluri said...

Sir, as mentioned in your post, for long term buyers who would want to buy now, the Risk:Reward ratio would be 1:2 by considering the top at 6350 and bottom at 4000. But again as you said, the bigger risk is with the time, since we are in a downtrend at the moment, it's very likely that it would take more time than we anticipate for the downtrend to halt, consolidate and move up. So, by getting the time factor into play, the above trade(4000-4700-6350) might not have a Risk:Reward ratio better than 1:1 which might not be a good trade.

So, what now for Investors?
Since the bottom can be at 4600, 4200, 4000..,tomorrow or what ever. Investors who would like to bet for long term would now have to look for accumulation / consolidation levels on the Nifty and try to enter the market by planning to get out if that accumulation level is broken. While accumulation happens, it's almost seen and we would get chances to enter in. This will give us a good Risk:Reward ratio.

So, What now for day traders?
Simple - "Trend is your friend" - We will just have to concentrate to follow it without having any bias and will have to plan to trade the relief rallies and pullbacks at times.