Sunday, May 11, 2008

Further Slide in Markets

We are fine as long as a trend is in place. As soon as the trend changes, we start looking for supports/resistances. Usually, we will be able to find multiple supports and resistances below or above the breakout points. But the markets have a mind of their own. They will choose one of those multiple levels as a support or a resistance and we don’t know which one. We can only guess where there is a maximum probability of finding support.
One of those high probability support levels was available yesterday near 5070 but the markets crossed that without a second thought. The markets became weaker through the day, probably, because the inflation data did not show any improvement. This is the 60 minutes chart of the Nifty and we find from the two trendlines visible here, that support is between 4910 and 4930. According to the pattern breakout, the target for the downmove is approximately 4920. Today again we have multiple supports available between 4910 and 4930 and there is a high probability of the markets finding support. Now, whether the Nifty does find support near these levels is up to the market to decide. We can only take action based on what the markets are telling us. As of now, they are telling us that we are in a short term downtrend and short term long positions should be avoided for the time being. A move below 4890 will give us a signal to close intermediate long positions too. Long term long positions should be maintained till 4500 is crossed on the downside.

Continuing the webinar on Fibonacci retracements posted earlier in the day, we can apply the Fibonacci retracement levels to this chart and see where support is likely. I suggest, you right click on the chart to open it in a new window so that you get a clearer picture and can read and see side by side by toggling between the two windows. Now, I have drawn two retracement levels here, one in green for the low formed on 18th March to the high formed on 2nd May (let us name it as ‘A’). And the second one is in black for the low formed on 7th Apr to the same high on 2nd May (let us name it as ‘B’). As can be seen from the chart, we are currently very close to the 38.2% Fibonacci retracement ‘A’ at 4980. Very close to that is the 50% retracement ‘B’ at 4965. The markets may find support at these levels or may decide to find support where there is a cluster of Fibonacci ratios, for example, at 4890 where the 50% retracement ‘A’ and 61.8% retracement ‘B’ are together. Or, it may decide to go further down where the ‘A’ 61.8% and ‘B’ 76.4% retracements are at the same levele at 4790. Where the markets will find support is for the market to decide.

We shall wait on the sidelines without holding any long positions and buy when the market gives us a signal that support has been found. The long trades that we have entered into in the last few days are all intermediate term positions and should not be closed unless 4890 on the Nifty is broken, unless the stop loss is hit first. If the stop loss has not been hit and the Nifty does go below 4890 then one has to take a call whether to sell there or still wait for the stop loss to be hit. I would, personally, prefer to wait for the stop loss to be hit.

Let us wait and watch where the markets find support.

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