Whenever I bump into someone involved with the stock market, he asks me, “Where is the market headed?” This is a moot question because if we could forecast the direction of the markets, we would all be making money. For some people, forecasting is as easy as the flip of a coin. It’s either ‘up’ or ‘down’ and the chances of each possibility are 50%. However, this is not enough. What we need is an edge—a tilt of just 0.01%—that can tip the scale and give us a hint of the direction to follow.
Let us study the above graph and see if we can estimate the direction of the market. To be able to do justice, one needs to look at it from two perspectives, time and price. The Sensex saw an all-time high of 21,206.77 on 10 January 2008 and a low of 7,697.39 on 27 October 2008, which was an all-time low.
Subsequently, the market moved up, with minor corrections on the way, which demonstrates that the uptrend is still intact. The Sensex crossed 16,500 in mid-September. There is a possibility of a correction as the indicators are in a stretched mode, conveying a loss of momentum, but 16,046 is a very strong support. So where does the market go from here?
The simplest thing to do is to calculate the next logical resistance from the high of 21,206.77 to the low of 7,697.39, and we get a level of 17,249. The next time-cycle to watch in the near term will be around 9 October 2009. I am not predicting that the market will turn on this date, but that it is a day to look for a potential top.
A new high should always be interrogated on the parameters of time and price, and we can do so only after it has been achieved. Meanwhile, an easy way to make money will be for investors to trade in the direction of the trend, which in this case is a bullish one.
The sector that has performed the best during 6-11 September has been information technology, while the oil and gas sector has been the worst performer. For the market to move up further, the latter needs to contribute significantly, otherwise the rise could be sluggish. The stocks to watch out for are Reliance Industries, Reliance Petroleum and the state-run Oil & Natural Gas Corporation.
Prakash Gaba is a technical analyst and trader
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