My Analysis of why bank trade failed?

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Dear Investor,

NIFTY had a really bad sell off this Friday. I was not sure what exactly happened but a night before this happened I had almost made up my mind to cash out or exit market. Especially the Bank Stocks. It was looking pathetic situation for bank stocks. I have no idea about the reasons but charts were screaming out loud that you better exit and that is why I sent you the alert early morning. Protecting capital was prudent action for now.

The reason I was bullish is in following chart. The red arrow shows the base NIFTY had been building for quite some time since mid Nov 2010. It made a double dip pattern on very high volume. That is considered to be bullish for stocks. After a break from this pattern within two days the market reversed and new bearish stories started floating around the market. The sell off picked up mid day Friday and you all know what happened after that.

The next possible action in the market will be a short term bounce. But the base is now invalidated and we have to wait for next course of action. Now lets look at the bank stocks I was positive about and why the trade failed.

The red arrow is the top of base. I assumed that IDBI has touched the 150 day line and it has to bounce from here. Read the above statement carefully. It was a pure guesswork. There was lack of market action statement. True trade would come when the stock moves above this resistance point. I wanted to be early based on NIFTY bullish movement. Unfortunately the market did not move as thought and rest the trades failed too. That is why it is important to know your stop loss and exit when market proves you wrong. If you are a very long term trader I guess you will still be fine but be ready to see red ink for quite sometime to come.

Damaged stocks do not rally just because they are oversold. It takes time for new buying interest to build into it.

IFCI trade failed is also a surprise for me. I could have never guessed that this is what would happen to this stock. It perfectly took support around 150 day line and made double dip and now its reversing on heavy volume. Take the loss and move out. The reason I always advocate small starting position is this. It lets to test the conviction of market. If we take big position then the losses are too big to take and you get sucked into loosing trade. A 10000 Rs trade is easy to exit even after 20% loss than a 1 lakh rs trade that will bring your portfolio down quickly and probably less likely to recover that soon. Take small positions in the beginning and test your pick. If it works the trend is never one or two day thing. It runs for 3-4 weeks and probably longer.

Important change has happened to this marketplace with recent actions. The era of easy money is over. You buy any stock and market only goes up that time is no more your friend. You will have to pick your investment and cut losses sooner. 2011 will end the year lot higher than where we are today but the ride is going to be jumpy.

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Thanks
Anil
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