Tuesday, May 6, 2008

Is That It? Is It Already Over??

The Nifty came down as expected and found support at 5110, very close to our expectations of 5102, and reversed from there to close near 5150. The question to be asked now is – “Is that it?” or “Is the correction already over?”. Well, let us look at the 60 minutes chart of the Nifty below and try to analyse.

5102.25 happens to be a Fibonacci retracement level, which in most cases, provides a pretty accurate support/resistance to the stock. This need not be a 23.6% retracement always, but can be the 38.2% retracement or the 61.8% retracement but in most cases the reversal point is a Fibonacci ratio. So, the price reversing from close to the 23.6% retracement level suggests that it may be over. There is one more thing visible from the charts. The solid brown line happens to a trendline connecting three lows in the last one month. This line should provide support to the prices between 5090 and 5100. This level is likely to increase by roughly by 3-4 points every hour. So, hopefully, during the day tomorrow this line may be touched and Nifty may bounce back from there.

That is not the end of it. There is the Relative Strength Index (RSI) also, which touched 40 and then went back to 44 in the last hour. While it is difficult to say whether 40 will be tested again or not, but it seems likely that 40 will not be breached. This is a bullish sign and again signifies that we have already seen the end of the correction, or will see it tomorrow. So, as of now all things seem to be suggesting that we should be looking at our next target of 5441 soon.

The Nifty has lost almost 200 points (190, to be precise) from its high, yet we feel as if correction has not taken place. There are two reasons for that. One, we have got used to bigger corrections, which may not come when we are in a bull market. Maybe these are the signs we need to look into at such times. Secondly, in the last 3-4 days there have been spikes for very short time both upwards and downwards. If we take only the closing prices then we are down only 100-120 points from the top. But is a 200 point correction big enough. It does not seem so and because we have got used to bigger corrections. But this 200 points is a full 23% decline from the last big rally, which is quite significant. We may think differently but the markets have a mind of their own. If they decide, it is over then IT IS OVER, no two ways about it. No stocks discussed today.

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