Nifty : TRIN view

For last few days we have been seeing Nifty rallying even though there is lot of skepticism around with "experts" first pointing 5000 and then 5100 as strong resistances. The funny thing about market is that disbelief related to a particular move is an ideal condition for it to play along.

So if on Friday the only move I and a whole lot of "Shorters" expected was down or a minor bounce which would be sold off, we were surprised by a strong move from 4935 to 5070! We also have been feeling that way since March, when all that was between Dow 6500 and Dow 5000 was TIME! And since then most of us have painfully seen the stocks rise in an unbelievable way, majority of the them multiplied by a factor of 5 to 8. Well my point in reliving the pain is to point out how extreme sentiments in Investors affect the Market.

Coming to the Technicals; though the Nifty has been rallying from the 4540, it has been doing it with some negative divergence. Apart from it the only other bearish indicator left is the TRIN. TRIN for those who are unaware about it measures the ratio of money flowing out of a falling stock to the money flowing into rising stock. TRIN can be calculated only for an Index. Moreover day to day values of TRIN swing wildly, so normally a 10 day simple moving average is used. Bottom line is that a rising TRIN is bearish and a falling TRIN is bullish.

The chart above shows the recent TRIN and Nifty relation. Look how at A and C the rising TRIN had bearish impact on Nifty. Interesting to note is that how at B the small rally in TRIN was negated in effect. The current rally initially had TRIN falling but suddenly we see that though Nifty is rising the TRIN is also keeping up. The reason definitely being the rise not having large volume or only a few stocks are propelling the rally. Whatever it is, one thing for sure is that the rally is not having great legs to run on.

The another thing to be noted on the chart is how 0.6 to 0.7 has acted as a decent support of TRIN having just a single "throw over". If this level has to hold we cannot expect any major broad based rally in the Nifty before having a decent correction.

One more point which I note but am not sure of is the green trend line of the TRIN. We can see how apart from a June aberration the trend holds on. The doubt that I have here is that can something which is a result of trading and not trading itself follow Technical patterns? But if support on such a thing can exist so should trend lines. I would like to know what other readers think about it.

Assuming TRIN to also follow these patterns we see that it is forming some sort of "Descending Triangle" which classically breaks on the downside, though not always. Which ever side it breaks we can expect some large moves in Nifty, my guess would be an early 2010 boom or bust. There is an eerie similarity between the CBOE VIX and TRIN. Lets decode...