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Which way is the market headed?

Source : BUSINESS_STANDARD
Last Updated: Thu, Jan 31, 2013 19:12 hrs
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The Reserve Bank of India just about met market expectations in executing a minimal cut in cash reserve ratio and repo rate. A lot of bulls were hoping for a more drastic cut and the market reacted downwards after a brief intra-day rally.

Given the settlement, we’ll have to wait and see the extent of carryover in index derivative positions. As of now, the build-up in the Nifty options chain shows a very high open interest in the February 6,200c. This is likely to be a major barrier.

The important question for a positional trend trader is, of course, whether the uptrend that started in late November is still alive, or if it has reversed significantly and pricelines are likely to see further falls. The two key indices would be the Nifty itself and the financial index, the Bank Nifty. Both indices hit 52-week highs on January 29 before reacting down.

There are several factors to consider. One, is that the Budget-related expectations will play a role through February. There is usually some surge towards the last week because bulls hope against hope that the Budget will be "good". The rumours may go both ways because the finance minister has hinted that he may raise taxes and national accounts are in terrible shape.

In the purely technical sphere, the intermediate uptrend started in late November with a breakout above the Nifty 5,850 and the Bank Nifty 12,500 levels. It has already lasted around 10 weeks. Intermediate trends can mature at anywhere between 2-14 weeks, so we may be due for a reaction. In terms of pricelines, a pattern of higher highs and higher lows has been maintained. This suggests that the trend was up till January 29 mid-session, at least. The levels to beat would be 6,111 (Nifty) and 12,960 (Bank Nifty) to establish new highs.

On the downside, the Nifty should ideally stay above 5,920 and the Bank Nifty above 12,650. If those levels are broken on a downtrend, the chances are, there will be a deeper intermediate correction because we will see a pattern of lower lows. Some traders would say that a five per cent correction from new highs is reasonable - so that would be roughly 5,820, and 12,350. My guess is, if 5,900 breaks, the Nifty could drop till 5,750.

Under the circumstances, if you're a short-term trader, you would expect the indices to see choppy trading between 6,000-6,125 and 12,750-12,950. You would want to be short if the Nifty drops below 6,000 and the Bank Nifty drops below 12,700. If you're looking at the next four weeks, the trend follower would stay long with wider stop-losses at 5,900 and 12,600. One problem with a trend chasing style is that you must accept fairly large draw-downs because you are hoping for a bigger upside.

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