Nifty Index updated on 07 July 06

Disclaimer: These are my personal thoughts and not trading advise. To view the full chart, right click on the thumbnail and open in new window.

As suggested yesterday, we did see some strength in the opening. However, as the day progressed, we saw three events, which confirmed the weakness.

One was the downside violation of the short term (thin blue) trendline, which was holding up with higher bottoms all this time. That was our first warning signal.

The second alarm bell was the simultaneous violation of a longer term (thick green) trendline.

The third was that it has made a lower top.

These three factors put together allow us to conclude that the short term up trend has come to an end.

I have been visually carrying the stops, which bulls could have adhered to for the whole of last week.

Now the flip side. There are two positives for the Nifty.

One “ray of hope” for the Index is the second line of defence (thick blue line), which is still holding. However, this trendline may not help too much.

The second is that the almost parabolic pattern of this sharp fall. After this kind of a fall we may expect a minor pull back to the upside, but that will only encourage bears to come out with full force and initiate fresh shorts.

Here is what may happen on Monday. The market could open weak, at around the 3000 levels, which will trigger a lot more stops of bulls. It could then retrace upwards. However, it seems unlikely that bulls who have taken long positions on Thursday and Friday could get exits easily.

On the other hand, if the market opens strong, bulls could exit their losing positions, with minor losses, and sit back and evaluate what went wrong. And then ... plan for another day.

Which brings us back to a very important point, which I am very fond of repeating again and again … plan your trade and then trade your plan. Before initiating a trade, answer two simple questions … what if I am right? … what if I am wrong?