Sunday, June 8, 2008

Nifty All Set to Open With a Big Gap Down

There are days when you are totally lost about what is going to happen in the markets. Today is one of those days. I have no idea whatsoever what is going to happen. I am totally lost. All the indicators are still looking weak and nothing suggests as if there is any strength that we can hope for in the markets. I need ideas from my readers about what they think about the markets right now. Are we going to go further down or are there any supports likely? Please do post your views in the comments section below this post.

Nifty Daily Chart - Bollinger Bands

Seen above is the daily chart of the Nifty. Also attached on the charts are the Bollinger Bands. It was widely believed that prices move within a band of 2-4% from their moving average, which means that prices tend to go 2-4% above their moving average, then reverse, cross the moving average downwards, go 2-4% below the moving average before reversing again. These bands were modified during bull markets, bear markets and sideways markets. Bollinger Bands work on a similar principle except that there is no need to modify the bands during different market conditions. The calculation involves the calculation of the volatility and standard deviation of the stock/index and based on that volatility the bands either contract or expand from the average. Here is a short tutorial on Bollinger Bands.

The only way to make profits in the markets is to buy low and sell high, or buy high and sell higher or sell low and buy lower. But what is low and what is high? The Nifty is near 4500 today. Is that high or is that low? If we say it is low since it is near its lows, how do we know that it will not go lower to 2600? And if it is high, how do we know that it will find support near 4500? Bollinger Bands give you no clear buy or sell signals. But they are very good at giving you ideas about what is going to happen and whether we are near the highs or the lows. Whenever in doubt, I use Bollinger Bands. When the prices are near the top of the band, we know that it is time to come down with support at the moving average and second support at the lower end of the band. Similarly, when prices are near the lower end, it may be time to reverse and go up to the moving average to find resistance there or continue to the top end of the bands. Of course, the situation changes when prices close outside the band, in which case it becomes a continuation of trend rather than a reversal.

Things are not clear even from the Bollinger Bands this time. We had three continuous closes outside the lower band in the last five days before a blue candle came and closed within the bands indicating a reversal. Things are fine upto here. This is where it starts getting messy. After this blue candle, the Indian inflation figures are declared with it increasing to 8.24% (no surprises there) and we get a red candle. The same evening crude jumps up $10 a barrel in one single day, the Dow Jones crashes by 400 points in a day and, obviously, the Asian markets will open lower on Monday. With all these global cues, our markets will definitely open with a big gap down. Now whether they will sustain those levels or come back up is another question. If they do sustain those levels and we get another close below the lower end of the band, we are in for trouble – BIG TROUBLE.

But, in case they reverse (my guess is, they should, but I could be wrong too), things may start looking a little rosy for sometime. Prices will reverse, there will be some short covering, prices shall go to the moving average between 4850 and 4900 and find resistance there and then come back again to complete the 5th wave of the C wave of this bear market, as was explained in one of my
earlier posts.

Well, there are some positives available, though the negatives heavily outnumber the positives. The Bollinger Bands create enough confusion because of which I have not added too many trendlines. In fact, I have added just one small thin dashed brown trendline (marked by the green arrow in case you miss it in all this confusion). This is providing support to the prices near 4463, we have support of the March lows at 4468 and January lows at 4448. With three supports close together, there is quite a possibility of a small reversal from here. But it all depends on how it pans out tomorrow. Dow Jones, on Friday, was down 3.13% from Thursday’s close. If our markets open with a 3.5% gap down, they should open at 4466, still above the supports. So, maybe, just maybe, there are some hopes alive.

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