Tuesday, September 6, 2011

In the contraction phase

Regular readers know that I am a big fan of volatility cycles. These are essentially cycles of expansion and contraction. When the Nifty rallied from 4700 to 5080, there were large range bars which were the expansion phase. Once we have expansion, the next phase should be that of contraction which probably started on Friday and continued yesterday. Today (tuesday) should continue as part of that contraction.

We are traders. We undertand that the market follows patterns but each instance of the pattern is likely to be different in some way. This means that my expectation of contracting markets is broadly correct, yet today need not follow the expectation since each new day is unique. So, what could change? Expansion, obviously! While chances of an expansion today appear dim, there could be sharp move up or down. In fact, the worthwhile trade today will be if the market decides to go into an expansion. If we remain in a narrow range, trading is likely to remain choppy.

If you found this a bit difficult to read, do excuse me, but read it again!


K_Vir said...

Big thanks for your posts which area always full of knowledge and interesting to read. We look forward to each. Yes, you have highlighted volatility cycles in past and helped us understand and leverage the concept.

Concept of Narrow and wide bars is quite interest into and useful.

Sasi Uppuluri said...

Sir, Looks like we would be in contraction phase with tradable swings. I have this view because we have a good space to trade between the current levels of 5017 on Nifty and its nearest support and resistance points. And also because, though the broader trend is down, there are many stocks in Nifty which show that a good amount of pullback rally to the upside is left in them.

Balu said...


You are not appearing on tv. when will you be back sir?