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ShareMumbai: On May 19 (headlined Coppock signal: Don't be a sucker), it was advocated that leveraged players would be trapped on the wrong foot if they went long after the election results triggered a frenzied buying atmosphere.
The hypothesis was based on a few time-tested factors, which are still valid and will remain as valid as they are now, even half a century forward. They are:
- The markets rallied on May 18, 2009, with gaps and witnessed record-setting dual upward circuit breakers. That meant no retail investor / trader managed to buy on this day. The shock and awe of the next session indicated that little if any buying was seen from the retail side.
Smart money did manage to get in on some trades, though. By the retail traders were expected to get in, the markets would provide overbought readings on the short term charts.
- As per Japanese charts, open gaps are like open windows on a snowy day --- they cause sickness if not closed soon thereafter. What happened on May 18 was not opening of twin gaps, they were the size of Noah's Ark! Unless closed or at least re-visited, a lot of dis-equilibriums would be created in the markets. Therefore, the upside potential was clearly calibrated and did not warrant fresh aggressive leveraged longs.
- The entire decline from January 8, 2008, to October 27, 2008, should be treated as 100 % and a 61.8 % retracement may be calculated thereof. This 61.8 % is known as the 'Golden ratio'by Elliot wave practitioners. The golden retracement of the entire fall meant the Nifty spot would run into rough weather near the 4,800 mark. Obviously, this is a rough and ready calculation rather than a laser precise metric. The only "sure thing" a technical analyst would know is that the closer we got to the 4800 mark, the heavier would be the selling. This was seen on the Nifty spot as it reversed from the 4693 on June 12 2009 and made a bar reversal cum swing top as per Gann (technical analysis) charts. It maybe noted that the Nifty had already rallied past the 52 % retracement on May 18 and therefore the "cream was out" for a Johnny-come-lately bull. The reward was a measly 9 % upside if the Nifty rose in a textbook format (it seldom does) and the downside was over 15 % if not more. Buying, clearly, did not make sense.
Where to now?
The post mortem done, we look forward and hazard guess/es as to where the Nifty can be headed in case of a correction that gains momentum. As per the retracement parameters, the first support will be at the 4175 levels where some short covering cum fresh buying maybe likely. The second and more significant support will be at the 3875 levels, which will see more aggressive bear covering and therefore a more meaningful bounce. Should this level be violated with force, expect 3665 where the entire rally from March to June will be corrected by 50% and the open gaps left on May 18 would be filled.
As of now, the possibility of the 3665 level being tested appears to be marginal, though markets are known to surprise the unprepared mind.
Traders should also note unmistakably that the 4400-4450 band on the Nifty is a "make or break" level for the markets. That is because the band proved to be a double bottom support for the Nifty in 2008 (March and June).
The bulls displayed significant amount of hope on these these occasions. Once violated conclusively in July 2008, the markets simply collapsed like a pack of cards. In my opinion, trader memory is fresh with this event.
Unless the bulls manage to pull the Nifty spot above this threshold with huge volumes, significant addition to fresh long positions and keep the Nifty above this mark on a consistent closing basis, the chances of an immediate recovery maybe slim. Keep watching this threshold as a Lakshman rekha for the near term. Momentum players are advised to buy only after the markets stay above the 4450 mark. Till then, play safe, conserve capital and await your turn to buy again.
The writer is a Mumbai based investment consultant and invites feedback at vijay@BSPLindia.com
