Lots of analysts and market participants have highlighted and also been concerned about the loss of momentum behind the recent leg of the rally in the Nifty. But a logical question that needs to be asked is ” So what, what is the big deal?”
Just because there is a divergence between the price action and some lagging indicator (such as the Relative Strength Index or Stochastics), it does not necessarily imply that a reversal must ensue. A few who swear by Elliott Wave theory have also made a bold prediction that the Nifty has probably made a top for this year which is unlikely to be breached for several months. They may be right, but it is still a view and should not form the basis for someone’s trading or investment decision.
What is our take? We are not in the business of putting out predictions. We do have a broad view on the market and that is meant to be only a guide post. The view has nothing to do with actual decision making with respect to trading or investment. Our trading decision and recommendation is always governed by the price action and not based on our views or expectations.
It boils down to risk-reward and understanding inter-relationship between different Swings in the price action. We remain bullish on the Nifty and it would take a fall below 5,940 to even consider a short-trade in the Nifty. The sequence of higher highs and higher lows is still intact and there are no signs that the Sellers have an upper hand.
When there is no justification even to entertain a bearish thought, why should someone think about shorting or worrying about the long positions. Not for a moment are we advocating complacency. Our trailing stop loss is at 5,900, basis spot Nifty. What we are trying to convey is that it is very easy to get influenced and swayed by the perennial flow of recommendations and views inundated from various sources.
The daily chart of the Nifty featured below details why we need to be cautious. The thought is governed more by the price action and not the divergence. We do not use any indicator or moving average and we find little reason to use them.
What if the stop loss at 5,900 is hit? It would flush us out of the long positions and would set us on the hunt for shorting opportunities to participate in the subsequent down move to 5,650-5,700.
Be objective and trade your PLAN is what we want to convey through this post.
TRADE SAFE AND DON’T GET HURT.