Action-Reaction: Continued…

June 11, 2012 . FundsIndia Desk

In my previous post, I talked about the Newton’s Third Law of Motion and how it relates to the stock price movement. Let’s take the discussion forward and apply this concept to a live action and see how it pans out.

Featured below is the daily chart of the Nifty. In the first chart, I start with a centreline which is nothing but a trendline that cuts across price action and has multiple touch points.

Once we have a reliable centreline, it solves most of the problem relating to the use of Action-Reaction methodology. Once I have a centreline to work with, I use the maximum excursion point from this centreline as the action point. In this case, the low recorded on May 18 at 4,788 is this action point or the point of maximum excursion.

I then flip over the same distance from the centreline to the action point to the other side side of the centreline, to get the reaction line. Have a look at the chart below. This gives a reference point or a target, if you will.

The current value of the reaction line is 5,230. Remember that the line has a downward slope and the target or reference point would drift lower on each passing day owing to the downward slope.

While there is a probability that the price might run out of steam at the reaction line, it does not mean that one should short the Nifty right at that reaction line. Taking trades off Action-Reaction lines is a tricky subject and a complex one. Please do not hurt yourself by getting adventurous.

If the price breaks past this reaction line, it tells a different story altogether. The breakout would be a sign of strength and we can work out higher targets once the event occurs.

I am equally anxious to see how this pans out. Watch this space for updates.



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