Monday, May 26, 2008

Another Day in the Red, Technical Bounce Back May Come

It was another red day for the Nifty and the last three candles have been pretty large which suggests that the prices are coming down without finding any support inbetween. The trendline that was in place since the low formed on 18th Mar 2008 was easily broken through yesterday. Till a support is found at some level, it may continue to fall at the current rate of 70-80 points in a day.

Seen above is the daily chart of Nifty. Besides the upward sloping trendline, also seen are the Fibonacci Retracements of the rise from 18th Mar 2008 to 2nd May 2008. We have seen that the 23.6% and 38.2% retracement levels were crossed without any hassles and the same seems to be the case of the 50% retracement, though, that still needs to be crossed decisively. The next support comes in at the 61.8% retracement level near 4785. Let’s hope that support is found there or else there may be further downside involved.

In
this post I had mentioned that I am trying to develop a trading call system which gives me small profits but gives me profits 85-90% of the times. Let us name it as ‘System A’, for convenience sake. This system had given me a long entry for Nifty Futures at 4998 with an exit at 5100 and a short entry at 5036. Thus, I made a profit of 102 points on the long position and am gaining 150 points on the short position. Before that I was given a short signal in the beginning of the month at 5178 which was eventually covered at 5010, a profit of 168 points, which means a total profit of 420 points in a month which is not yet over. A profit of 420 points on even one lot of Nifty works out to a profit of Rs.21000/- by paying a margin of only Rs.35000/- which means more than a 60% return on investment in less than a month. Of course, this has been a good month for ‘System A’ and future months may or may not better the current performance.

By going below the previos low of 4913, it has been confirmed that Nifty is now in an intermediate term downtrend according to the Dow Theory because a lower high and lower low are already in place. The target, as mentioned in the previous edition, could be as low as 4500 but there are supports available at 4800, 4630 and 4470. While the Nifty remains in a downtrend we can just wait and watch where the decline will end. No buying is recommended for now. After five days of lower lows and lower highs, there may be a small bounce back which could go upto 5020. This should not be mistaken for an end of the downtrend but should instead be used to exit from long positions or to go short. There is more downside possible.

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