The need for a strong base

In my previous article (November issue) I had concluded that the market was due for correction and the maximum permissible fall for the Sensex bull run to remain intact was 15,000, with interim support coming at 15,878. I had also said that a correction to 15,000 would be within acceptable technical parameters.

The anticipated correction was witnessed and the market saw a low of 15,330 on 3 November 2009, but closed positive for the week.

Some time ago, I received a call from a lady in Coimbatore who has been trading in the markets for the past few months and has lost about Rs 2.5 lakh. I hear these kind of sob stories very often.

Trading in futures is not easy. It’s like trying to drive a sports car when one has no experience riding a cycle. Traders tend to believe that making money in the markets is very easy. What we need to understand is that while one is making money in the markets there is someone on the other side who is losing it.

For a trader, this zero-sum game takes place every day and the trick to making money in the markets is to be right consistently. If you make mistakes continuously, you might end up losing lakhs like the lady from Coimbatore. The best way to gain from the equity markets is to understand the direction in which they are moving.

The market dropped to a low of 15,330 on 3 November and closed positive at 15,405. So the correction to 15,000 levels, considering a long-term perspective, is within acceptable parameters. But this three-day uptrend that we witnessed seems more a reaction to the 11-day downward move that we saw after the high of 17,493 on 17 October 2009.

Ideally, I would have preferred the market to have spent more time at the 15,000 levels to stabilise before moving forward. However, this has not happened. The market should have formed a base before rising again. The Sensex now needs to taper off and come down to form a base near the 15,112 mark and then move up.

Till this happens, the direction of the market will not be clear. It will be extremely difficult and dangerous to trade in this situation. It is in these circumstances that inexperienced traders lose their hard-earned money. Technically, a base close to the 15,500 zone would be an acceptable parameter for the uptrend to remain intact.

Prakash Gaba is a technical analyst and trader