Range Bound Markets Continue

On almost a daily basis, we are seeing one or two up days in the Nifty followed by one or two down days. This happens within a range. We have also been observing since the last three weeks that the Nifty has been making higher lows and lower highs, signs that it is going inside a contracting triangle. This triangle has been drawn in the 60 minutes chart shown below.

This triangle will be broken soon, especially since we are now approaching the apex (end) of the triangle. A move below 4650 or, on the other side, above 4830 will signify the end of this triangle and that will bring us back in the broader range between 4480 (and more recently, 4625) and 4970 which has been shown by the dotted brown lines. Assuming that this triangle is broken out on the upside at a level of 4830 then we get a target of approximately 5450. But before that we would still have to cross 4970. So, while a target of 5450 is possible but some amount of resistance should be expected near 4970.

Why have we been stuck in this trading range for such a long time? If we remember correctly the market fell sometime in Jan and now it is April. We are in the 3rd month now. Well, to be precise 77 days (calendar days, not trading days) have already gone by since we made that low of 4448 on the Nifty. I actually did an analysis of the major falls that we have seen in this bull market which started in 2003. The markets have seen major lows in May 2004, Jan 2005, June 2006, Mar 2007 and now Jan 2008. The last four times the markets came out of the consolidation the quickest (39 days) in Apr 2007 and the slowest (161 days) in June 2005. On an average the consolidation lasted for 81 days. So, that suggests we should soon be out of this range, maybe another week or two. The other occasions have also seen corrections of more than 30% but they were slower. This time we lost about 30% in a week. And a longer consolidation/base-building is expected.

We are going to be stuck in a range. It often happens that the markets may move out of a range just to get into another range. We should only buy when the markets are giving us a signal that a move out of the range is likely and that the probability of a profitable trade is higher. Of course, if the market moves against us we can get stopped out too. Getting stopped out is always possible but that is a risk one has to take if one intends winning the game of profitable stock trading.

Happy investing!!!

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