Update for 17th January 2011

 

     How Far Can the Market Go Down ?

Some of the Investors and traders might be curious why such a negative headline as the above one is being used on this site when so many investors and traders might be having heavy losses.  Well, let  this author make it clear !  It's not about being negative. It is just the outcome of an attempt to become neutral, objective and also to avoid the foolish bullheadedness. Let me make it clear once more with some explanation. Markets are falling now because of the simple reason that the markets went too far or overboard on the way up and was not actually supported by the fundamentals. Even after the fall of about 12.5 % from the highs, Nifty index is still quoting at a relatively high historical trailing price earnings multiple of 22.5 as on 14th January 2011. It is a simple fact that this level of high valuations is not sustainable on the face of slowing profit growth. Readers interested in a simple analysis of long term historical trailing valuations of Nifty index may click here to check out the Nifty Fundas page on this site. Further, if anyone is still not happy with the explanation for the fall, suffice it to say that these outcomes were twice discussed and the necessary warnings were made on this site in the posts dated August 22nd and September 9th of last year.

Coming back to the original question - How far the markets can go down, the correct answer is beyond the reach of anyone at present. Therefore, let's check the charts of various time frames to reach a best guessed answer to this question. But, let's check out the latest market action first.

We had indicated in the last post that "according to the available indications so far, the chances of the market breaking the 5700 mark is higher than a recovery from this level for various reasons. "

 

Nifty Futures - Intra-day Chart 

Update for 14th January 2011

     Will the Down Trend Continue ?

In the previous post we advised that traders may again look for short trades after the completion of  the bounce. This is a quote from the update for 12th January, which was also reproduced in the last post ." In case Nifty futures breaks above the immediate resistance area of 5850 to 5865, we may expect a rally even to the 5940 to 5950 area. However, such a rally will not be sufficient, to prove conclusively that the the down swing has ended, given the lack of interest shown by the FIIs on loading up the expensive Indian equities in the new year. Hence, traders may again look for short trades after the expected bounce."  

The last post also added the following : " .... option OI data seems to suggest that another down move is still possible towards the 5600 strike, on the completion of the present short covering rally."  

Therefore, anyone following the regular updates of the Momentum Signal trading system  could  have again  made a profit of around 100 points in the Nifty futures, by entering in to a short trade at or near the indicated resistance at 5865. 

Now, let's check the market action of Thursday. On Thursday morning, Infosys declared it's less than expected ( even though it seemed that the fault was with the analysts ! ) quarterly results . Infosys and the IT pack were the strongest group of equities in the indices and the last hope of the bulls. Once the market heavy weight Infosys lost more than 3 % at the opening, the bounce back failed at the first resistance of 5865 itself. Therefore, Nifty futures sold off  to the 5750 area and closed at 5761.

Nifty Futures - Intra-day Chart