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The Correction or Back to Basics

April 17, 2009

This article was to be written yesterday. Instead it’s been written today. Yesterday’s +3.0% move in the 50 share NIFTY index should have made me satisfied and happy. Instead it put me into a night of fitful discomfort. I don’t attempt at explaining the markets. I don’t care for news and link it up with the market’s ways. But yesterday’s behemoth rise, has given me a wisdom, which I feel grateful to have. Its this: Madness of the crowds know no logic.

Attached is the chart, of the NIFTY’s behemoth rise since sub 2600 till today.

THE DAILY NIFTY since the rise

Note the low volumes with which 3411 is rejected on 13th April 2008. Note the encircled candle near the green curve [200DMA]. Readers from my previous post in Seeking Alpha would have remembered the significance of 200DMA.

The level was tested on very low volumes. . In other words the price action showed the markets rejected that level. In fact the volumes were the lowest volumes since April began.

The trader in me shorted at the knowledge that market has rejected 3411[though I was carrying significant long positions too] and tested it at very low volumes. Yet the markets opened the Wednesday morning[Tuesday was holiday] with 50 point gap down and closed an extremely strong 100 points up.  A mammoth 150 point swing.What happened to my shorts will be related further down.

But the impunity with which the markets breached 3411 was shocking. Now I reason, it was possibly a bull trap, set by bears who just sidestepped at the sheer enthusiasm of bulls. Very interestingly when the markets closed NIFTY Near Month future which was at 13 point premium dropped 16 points at exactly 3.27 PM near the top at around 3505. It was perhaps an indication that an extremely canny institutional sell order has hit the market. And surely by the close [3.30 PM], NIFTY shed 10 points to close at 3492.

NIFTY was up at the close of 15th April with a swing of 150 points, circa one and a half times the daily volatility. It was overbought and a test was in order.

Today, the markets shed a mammoth 80 points to close below the 200 DMA. 3411 is being breached once again. It is not to say, that it won’t be tested tomorrow [Friday] from below again. But from now onwards, the advantage lies with bears. The test is likely to be extremely short lived if it occurs, and perhaps might not even transpire.

The Hourly NIFTY and the trendlines

This is the hourly chart for NIFTY.Note the trendlines. The Green one is the long term trendline drawn since sub 2600 levels, connecting the March end lows.

It is evident from the chart that, the intermediate trend line has been broken. Note the high volumes in the down bars and comparatively low volume in the retest bar. A perfect short setup.In the next one hour, it shed around 40 points [equal to the entire day’s move till then] to close at 3370.

From here, to where?

This is evident that, the intermediate trendline is breached{the yellow line in hourly charts}. The next stop is 3220, where the green line meets the price axis.

So clearly the advantage in the intermediate time frame lies with bears and 3220-3250 is the most possible testing range.I won’t be surprised if we are pulled back to the channel, formed by green horizontal line by the close of the month.

My shorts of Monday were taken care in the morning the next day,Wednesday, when I saw NIFTY gaining positive momentum. And went nett. Long in NIFTY, carrying the longs till today, when it tested 3411.At which liquidated my long positions and opened fresh shorts.

Disclosure: The author is net short on NIFTY.

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5 Comments leave one →
  1. April 20, 2009 4:51 am

    Hi Soham,

    I have been looking for a while, could you let me know how you get intraday data into amibroker? Is there a software you have for that?

    Thanks,
    chitragupta

  2. September 30, 2009 1:05 am

    No wonder that Nifty tricked you. Pl have a wonderful time studying the related matters on http://www.krsnakhandelwal.wordpress.com. Pl let me know if it can be commercially exploited with your help.

  3. Soham permalink*
    September 30, 2009 2:22 am

    Hi Mr.Khandelwal,

    I did happen to come across your blog before but what disappointed me, was the precense of too many subjective conditions in your Panchatattva system. e.g Quality of Management. How do we rank that?
    Political Situation?
    Heavily depends on your political bias.

    As such, this is not something, I would recommend anybody to go forward with.

  4. September 30, 2009 2:32 am

    I am happy that thought fit to air your reservation. In fact you have said it all, the subjectivity (net of all people participating ) does hold influence of share prices. You have to have experience enough to factor this in otherwise pure mathamatical calculation will lead you no where. However , I mat tell you that this forms only a small part of the whole excercise but at times proves to be the last straw. I would invite you to judge how the result analysis and the related trading/investment strategy has worked practically.

  5. Soham permalink*
    September 30, 2009 2:37 am

    I would say, if you can provide a track record, and some performance metrics, that would speak volumes of the system.

    Personally looking forward to the performance, even would be glad to post them up over here, linking to your blog.(if permitted)

    Soham

    P.S: A solid track record involves live performance over at least one change of market regime.

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