Eyeing on Nifty
The Nifty finally broke out of the immediate range of 5440-5550 and unfortunately for the bulls, the move was to the downside. For the third time to touch the nifty level of 5180 in a few weeks, whether the recent weakness will lead to a larger correction or whether buyers will step in once again. Unfortunately there is no easy answer to this question. This dilemma is what makes trading difficult. The best traders simply reduce their risk in uncertain times and then remain open-minded to any possibility. We’ve been noting that the markets have been vulnerable for weeks, but every dip continues to be bought. What makes this environment dangerous is that traders have been conditioned to buy the dip, despite the fact that anything that works too easily in the markets won’t remain that way for long. At the same time, the S&P 500 closed under its 50-day moving average for the first time since August 30, 2010. While this is certainly a bearish development, the S&P 500 rebounded sharply on Friday to close back above the 50-day moving average. While a one-day move above or below this mark is not significant in the grand scheme of things, the fact that the markets are waging a battle in this area provides us enough clues about the high-risk environment we are in. Traders need to stay very cautious right now.
While the markets could set a bear trap here and surge higher, the odds may be favoring more downside. Traders have been accustomed to buying every pullback, and the markets have rallied unchecked for months now. The general indexes broke under some key levels this week and unless they can rebound soon, the possibility of lower prices is likely. For traders who only trade to the long side, this may be a good time to raise cash and wait to see how the markets react. Even if the markets can find some footing here, the transition is likely to be toward more sideways trading rather than a straight shot higher. One of the keys to becoming consistent in trading is to recognize when to step aside. This may be one of those times where the day-to-day volatility is not worth the risk for short-term traders.
There are plenty of levels to watch that will alert traders to the danger of further downside, so that is where most eyes should be focused. If the markets can stabilize without violating these levels then we could be set for breaching upside range of 5600.