Markets Below Strong Support

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Today was a terrible day for the Nifty. It opened deep in the red today and with each passing hour it turned a deeper red, so that by the time it closed it was 250 points below yesterday's close while the Sensex closed 770 points in the red. Seen below is the daily chart of the Nifty.

There are quite a few lines here which may become a little confusing for some. The best option is to right click the chart above, click on 'Open in a New Window' and a larger image will open in a new window. Then you can toggle between the two screens (by using either your mouse or by pressing Alt and the Tab key together) and it will become easier for you to read the chart.

First of all let us talk about the blue lines. These were the two parallel lines forming a range within which the Nifty moved for a number of weeks. This range was between 4800-5500, a range of 700 points. The Nifty broke out of this range on Friday last week when we mentioned that the target for this breakdown gives a target of 4100. Coming to the thick brown line, as we had mentioned in one of the earlier newsletters, that this is the line drawn from the lows of June 2006 and Aug 2007 and is a 21 month old line and was providing support to the Nifty at 4700. That low has also been broken today. This may be the first sign that we are entering into a long term bear market now (which will be confirmed if we were to go below 4000). But there are supports in between, which have been marked by the dashed brown lines (highlighted by the blue arrows). The first support is at 4500, which is nothing but a cluster of about 10 days of prices, thus forming a very minor support. The second support and a stronger support is at 4100, which happens to be the pivot low formed in June 2007 and Aug 2007. This support matches with our target of 4100.

Long term traders and investors are now advised to refrain from entering long positions. Traders may like to go short at these levels. By looking at the charts, it does seem to be all gloom and doom. But the fundamentals speak a different story, though not as loudly as a month ago.

I finish today's edition on a gloomy note, but at the same time a word of optimism too. 'When you think that everything is finished, that is just the beginning.' One day the market will go terribly down and everybody will be thinking that there could be no possible way that the markets could recover now (which looks like the situation today) and that will lead to a panic and everybody would want to sell their holdings and would vow never to invest in the markets again. That is the end for those who sell out and when the majority does it, it is known as capitulation. And THAT, my friends, is the beginning. The markets would recover that very day.

Happy investing!!!

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