Apr 24th 2012 (Tuesday) – “There is lack of selling pressure as the market falls; it is unlikely to decline very much further”

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Let see what chart/tape is saying?
We have seen today: Wide Spread, Low Volume, Closing down 90pts on the low of the day.
1.     Up or down move if not supported by a gradual increase in volume, are not sustainable. Today we have seen a wide spread low volume down move which is not likely to continue. Hence, we may expect bounce tomorrow.
2.     Wide spread down day closing on the low of the day is a bearish sign. We do not see much demand coming in, not much support from buyers; prices are marked down to create panic among the weak hands. This is a kind of shake-out move where long traders are shaken out of their position and those who are sitting on the sideline are encouraged to take short positions. A shake-out can be defined as is a sudden wide spread down, usually on bad news. It is engineered to create panic selling, thus helping the transfer of stock back to the professional traders.
3.     Day by day trading range is going narrow and soon we will see breakout move on the either side.
Nifty moving towards support level of 5184 & 5134
In a down-move, where the price is getting close to the lower trend line (Final Support Line is somewhere near 5134), any low volume appearing will tell you that the trend line is likely to hold for that moment in time, because there is no effort to change the trend (you need selling to push through resistance offered at the support line).
§  If the volume is high, with a wide spread down, whilst the price is getting close to the lower trend line, we would expect to see the trend line broken due to the extra effort.
§  If the price action is approaching from above a trend line, touching or near the trend line, on low volume, we are expecting the trend line to hold due to the absence of effort.
The support line represents a resistance area which needs selling pressure to penetrate it. Low volume tells us there is little selling and thus the line is likely to hold. Note the words ‘approaches’ and ‘increased’ volume, both vital indications. If you are approaching a gap which you intend to cross over, you will run for it as you are approaching, resulting in an increased effort to cross over, as opposed to going right up to the edge before attempting your jump. The market acts in a similar manner.
Today falling pressure indicates that….
There are few sellers detected as the market goes down, shown by a wide spread down on low volume, closing on the low. This is not a buy indication on its own, but shows a lack of determined selling pressure as the market falls, and is an indication that the market is unlikely to decline very much further. If the professional money were still bearish, there would be an increase in selling on the down side, not a decrease.
This indication can become a buy signal if it closes on the high of the day and the lower price level has penetrated into an old previous support. It means if tomorrow Nifty fall down further and comes close to say 5134 levels only to bounce back and close flat to +ve on a lower volume, one should go ahead and buy Nifty.
God bless you!
Prof. Sameer Jain [Student of Market], E-Mail: Sameer@hbjcapital.com
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