Sunday, November 28, 2010

Sensex - An impulsive move down, 3.25 months Time Cycles operative!

We stated previously that "Please be ready for some crackling moves next week given the increase in volatility accompanied by November expiry next week". This is exactly how Indian market moved last week.
Traders would have found it very difficult to trade last week since everytime markets fall by more than 250 points it made a point of covering back the entire loss before closing again in negative
Dealing with such kind of volatility can be extremely painful sometimes as you might loose money even if you were right at the end of the day as intraday movements would have triggered stop losses
26/11 - Friday was no exception to that. In morning Sensex fall more than 300 points with a complete melt down in many of the securities like Coreprojects down almost 40%, IDBI down 12%, DLF down 12%, Punj Lloyd down 25%, and the list goes on… This was no surprise to us as we have mentioned before a move below 19300 would result in steep sell off and that is exactly how market operated
Coreproject made a low of 151 from 256 but recovered entire loss of 40% in last 1 hour. Even the company was not aware of any reason for such drastic movements in the stock and it was not driven by any news
Our belief is that news do not drive the markets. A classic example is the Housing Scam that was unveiled on Wednesday 24th November a day before expiry and market reacted to it in last 1 hour but the next day when more of the negative news were already out and everyone was expecting a huge gap down markets actually opened on a positive note. Trading based on just news would have been a disaster and LIC housing finance rallied in the morning sessions of the trade on Thursday
Sensex has been falling for more than a week and Banking & Real Estate stocks were already in a strong downward journey even before anyone was aware of the scam. The trend would just have continued whether the news would have been out on 24th or not
3.25 months Time Cycle has been working pretty accurately since past 4 cycles. If we assume that cycle to continue Sensex might hit a short term bottom by around December 7, but relying only on Time Cycles for trading can be very risky. It is good only as long as it works
Elliott wave counting can be very tricky in the current situation and we can make a case for a 3rd of a 3rd wave (very bearish) or a 5th wave in progress (short term bounce back).
We do not want to catch a falling knife and would advise not to buy in into the short term upward corrections but to use that opportunity to position oneself with keeping Risk Reward ratio in perspective towards building up short positions. 18500 level now forms a strong support zone and a move above 19600 will convey short term pull back of the entire move down from 21000 is underway.
We might be in a correction of entire rally from October 2007 but it is too soon to conclude that. Let us take a step at a time and wait for more clarity from Mr. Market!

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