The Sensex closed 336.04 points down, after recovering over 1,400 points from the day's low, as reassuring comments from the government.
The fall was anticipated on Wednesday, but the sharp recovery wasn’t. The noticeable aspect of the session was the poor volumes in the F&O segment and brisk activity in the spot market.
That leads us to believe that institutional support was seen at lower levels. The indices witnessed a circuit filter halting trading for an hour, bringing back memories of May 17, 2004.
However, the rank file market participant is drawing incorrect parallels between May 2004 and October 2007. The real thing is a correlation between October 4-21, 2005 and Oct 17 2007 trading patterns.
The analysis of the data available for the 2005 phase seems to indicate that retail players lost their shirts and stronger hands who “faded” the move went home richer.
Clearly, the declines were buy opportunities in October 2005 but the appearances were of a bear market culminating. Whenever such a haze is seen in the markets, veteran technical analysts call it the “Hound of Baskervilles syndrome”.
A parallel school of thought (advocated by Joseph Schumpeter) calls it the “creative destruction” theory wherein the markets undergo a state of flux.
Traders should note the decline in the markets on October 17, 2007 that took less than 5 minutes to shut down trading on the NSE on pathetic volumes, a hour cool off and then resumption of the buying momentum - albeit slowly.
The gap down opening meant few (if any) fresh shorts were added in the initial part of the session.
The retail player was busy monitoring mark-to-market pay outs in the leveraged segment so could not have fished for bargains in the cash segment.
The buying was therefore emanating from the bigger players. This is in line with the historical evidence (October 2005 included ) that a contra trend occurring in a Hound of Baskervilles pattern leads to a resumption of the original trend and a breakout past the previous top with viciousness that is awe inspiring.
It should be noted that this rally will not be coming anytime too soon as accumulation at lower levels needs to be witnessed before such a thrust is seen.
The 5,090 support advocated for Wednesday held and the Nifty spot bounced back. This level will be a critical short term support for short term players.
Upsides maybe seen approaching the previous highs, but may not achieve the same in the first attempt, nor is the ride expected to be smooth.
While the decline is far from done, the levels to watch on declines will be the 4,700-4,750 band in the coming weeks. Take a fresh view thereafter. The long term bull market is by no means over.
I believe the retail players should not get fazed unduly by the decline. You may even anticipate more such speed breakers, but buy on declines, have a longer term approach.
I maintain my view that the Nifty has the potential to possibly test the 6,375 levels by October 2008 as per price projection studies.
The author is a Mumbai based investment consultant and invites feedback at vijay@BSPLindia.com
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}