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ShareWhile Monday's fall was not completely unexpected, its ferocity has been somewhat of a surprise.
I had stated earlierthat rising soft asset (agricultural) prices have the potential to drag equity markets downward. There was another aspect to it as well.
Note how the Nifty was witnessing lower volumes on upthrust days and higher volumes in downtick sessions.
Especially true are the bearish sessions of August 6, 8 and 12. In these sessions, markets made lower tops and bottoms, and volumes spiked higher -- clear indications of smart money "distributing" paper to the gullible retail players.
This phenomenon is called 'fading the markets' and is invariably to the detriment of the small/ marginal players.
The much awaited warning never comes and the final sharp crack that occurs is invariably the only indication that the markets have changed gears.
History is replete with examples in the distant and not so distant past when the bear has crept upon the retail investor with stealth so deadly that forewarnings were conspicuous by their absence.Turn to Page 24
Take the years 1929, 1934, 1957, 1964, 1983, 1987, 1991, 1995, 1997, 2001, 2003, 2006 and finally the end game on January 8, 2008. The only minor cracks in the rally can be made out by the experienced eyes, which spot a curious
divergence in the market composition.
Invariably, the market leaders (index heavyweights) display signs of weakness (RIL has been weak during the upswing recently) and the rally is led by "side counters." The recent market upthrust has been led by the mid-caps, realty and select pharma counters. Financials (the barometer of NAVs) have been weak and should have raised red flags. While retail players may have missed the signal, they should not lose the lesson.
That brings us to the issue of where the current decline may stop. The immediate support will be at the 4240 if the 4350 support is violated on a consistent closing basis.
The 4240 level is the 61.8% retracement (golden ratio) of the rally that commenced on July 13, 2009 and terminated on August 4, 2009 with a sharp bar reversal. Should even the 4240 level not hold as a support, expect further declines to 4100 where fresh buying maybe initiated with a higher degree of comfort as compared with the 4240 levels. On the upsides, expect the 4480/4525 levels to be stiff resistance thresholds for the short-term momentum players and need to be overcome before fresh buys can be contemplated.
Till this resistance threshold is overcome forcefully, traders should focus on maintaining discipline and restraint on the long side. Capital preservation should be the key focus area as capital alone is your ticket to trade on another day.
The writer is the author of A Traders Guide to Indian Commodity Markets and can be reached at vijay@BSPLindia.com.
