Nifty Index updated on 14 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 a new window.
Just when we had smugly thought that the market is behaving exactly as expected, it turns around and upsets the cart. On Thursday I had made a wistful statement, “why can’t the markets behave as expected everyday?”
Avid index watchers would certainly turn around and say, “on the daily data released by the NSE, we do not see a lower bottom.” And they would be correct. Basically, I have filtered out the opening spikes which allow the charts to be slightly skewed, and have considered the data where the Nifty has actually been traded.
With Friday’s data in, it is very apparent, that the Nifty has finally broken the rising blue trendline. On its recovery path up, the same trendline has exerted resistance. The crack in the Nifty Future was even more pronounced than the Nifty Index. Further, what makes it seem even more bearish is the fact that the Index has gapped down, or what is termed as a falling window. Therefore, the projections of Thursday could be discarded for the time being.
As is a fact, a coin has two sides, so we will look at both the positive and negative aspects of the market.
The recent highs on the indices are not accompanied by volumes. This could be an indication that there has been no selling climax. On the other hand, volumes are rising on the Nifty Futures, and open interest is shooting through the roof.
What does that tell us? Things are not really what they seem to be. In all probability, there is a large scale arbitrage game being played between the cash and the futures.
So how could we trade this?
We could keep 3057 as a benchmark, where we could buy on dips. On the higher side, we could retain the 3200 level as the high mark to sell.
If the Nifty is unable to cross 3200 within two or three days on the upside, then we can assume that the uptrend has indeed terminated at 3200.
A closing below 3080 could further intensify selling pressure, which could allow the Nifty to test 3057 and 3025. Personally, I am trading with extremely tight stops, and my exposures are all hedged.
That is the only prudent way to go, when the market moves up 2% one day and 2% down, the second.