19 September 2010

Nifty : Then and Now

After the recent unbelievable rally in Nifty and few stocks the market has come into a very bullish mood. Upside targets are revised upwards daily. There is an obvious urge to compare this rally with the one in late 2007 and set our sight to 6000 and 6350 (the earlier top) as the next targets. But is this rally the same that happened then which certainly ended in pain, is it stronger and have legs to take Nifty to newer highs or this one is yet another trap for small investors hoping to make some hay?

Coming back to the urge of comparing this rally with the ill fated one 2.5  years ago. Above is the weekly chart of Nifty from 2005. Going chronologically we see Nifty's peaks in first half of 2006, early 2007 and finally in early 2008. If you see the Chaikin Money Flow (CMF) indicator, we see the indicator making new high in 2007 when compared to 2006 and a lower high in 2008 (divergence!). I always track CMF for reversal or trend continuation possibilities as this indicator not only takes price but also volume into consideration. Look how MACD got screwed when prices rise parabolically. The conventional rule is that momentum high precedes price high, so one could have got fooled "bigtime" by MACD in this case. So there always exist a case to look into few more indicators to get a confirmation of trend. Check how momentum indicated a divergence in the fag end of the rally (red arrow). I am sure MACD would have done the same in daily time frame! Another reason to check higher or lower time frames for decision making.

Now check the current rally, we have divergences splashed all over the screen. And the way Nifty and the bulls are ignoring it, I am sure we are in for a strong backlash. Only a modest correction, consolidation and consistent money flow would make the current rally sustainable. All of us know the rally is driven purely by liquidity, so we cannot pin point when this music will stop. But be sure it will stop when we will need it the most. There is no justification that can be given to the current levels and even the most optimistic of us would not have guessed it. But this is how market functions, there is no logic. There was no logic when it was at 6350, when it was at 2500 and then again there isn't now, and rest assured there will be no when there will be a massive adjustment in price in a short span.


Faisal Humayun said...

Surely, the mood of irrational exuberaance is building up in the markets. Also, there is no doubt that it is all the liquidity game. This is where the fear exists in terms of predicting any levels for the markets. However, the smart money will move out sooner or later making the fall equally or more sharper...I would personally look at the reluctance (in general) to short the markets (by a majority) before doing so.

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