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Let see what chart/tape is saying?
Let us first look into Wednesday & Thursday’s Nifty moves –
As mentioned in the daily market outlook report dated 18th Apr 2012 (“Expect gap-up opening above the upper trend line near 5300-5320. Upside must be supported by increasing volume.”), we have seen a gap-up opening but at the same time we have seen Nifty not sustaining the higher level and fell down only to close 10 points up on Wednesday on low volume. On Thursday, we have seen a gap-up opening followed by upside and closing 30 points higher once again on low volume. If you join these two days, you will see move like “U” shape which is called “testing” of supply or “testing” of selling pressure. Low volume means not much of selling pressure in the market hence market is likely to move up further.
Any low volume down-bars which appear after the prices have rallied and cleared the resistance to the left [like Nifty first crossing 5300 on Tuesday followed by low volume down bars (Wed & Thu)], is an indication of strength and higher prices to come.
Market moves up not because of buying but because of reduced selling pressure!
The danger to any professional operator who is bullish, is supply coming into his market (selling), because on any rally, selling on the opposite side of the market will act as resistance to the rally and may even swamp his buying. Bullish professionals will have to absorb this selling if they want higher prices to be maintained. If they are forced to absorb selling at higher levels (by more buying), the selling may become so great that prices are forced down. They will have been forced to buy stock at an unacceptably high level and will lose money if the market falls.
Low volume means low selling pressure & high volume means high selling pressure!
Low volume, or low trading activity, shows there is little selling on the mark-down. High volume, or high activity, shows that there is in fact selling (supply) on the mark-down. This process is known as testing.
You can have successful tests on low volume usually on bad news. This not only catches stops, but shakes the market out as well, making the way easier for higher prices. Testing is a good sign of strength (as long as you have strength in the background). Usually, a successful test (on low volume) tells you that the market is ready to rise immediately. Above move was seen in Nifty on Friday, Monday & Tuesday.
Any down-move dipping into an area of previous selling (previous high volume level), which then regains to close on, or near the high, on lower volume, is a loud and clear indication to expect higher prices immediately. This is a successful test. Lower volume shows that the amount of trading that took place on the mark-down was reduced, that now there is little selling, when previously there had been selling. Basically on Wednesday and Thursday we have seen above move in Nifty. At this point, it is now important to see how the specialists respond to the apparent strength seen in the testing.
Any testing that does not respond immediately with higher prices, or certainly during the next day or so, can be considered an indication of weakness. If it were a true sign of strength, the specialists would have stepped in and would be buying the market – the result of this professional support would be the beginnings of an upward trending market. So, in case if Nifty does not respond in the positive manner on Friday and falls down 50-60pts then it is clear that we have seen false “testing” on Wed & Thu.
God bless you!
Regards,
Prof. Sameer Jain [Student of Market], E-Mail: Sameer@hbjcapital.com
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