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IT'S COMMON knowledge that picking the bottom of a bear market is the most dangerous thing that one can ever attempt to do. And more than anyone else, this column has consistently asked readers to abstain from doing it. However, for purely academic reasons — if one were allowed to be brave and guaranteed that one would not be burned up the stake for being wrong — I am ready to say that the Dow Jones Industrial Average may have already bottomed out.
Above all else, the most compelling reason to believe (rather pray) that the Dow has hit a permanent bottom is that any further losses will take us to unchartered territories and will signal nothing short of a Great Depression — which, I am sure, none of us wants to see in our lifetime. And if the Dow has bottomed out, there's a fairly good chance that the Nifty may have already hit a bottom.
WHY HOPE? Let me make it further clear that at the time of this edition going to the press, the Dow was trading with losses of over 240 points. So, it is very much possible that it collapses big time on Friday, making this article the most ridiculous in history. However, ignoring these consequences, let me tell you why I would like to believe that the Dow's bottom is already in place. As is evident from the adjacent chart, since the beginning of the 20th century, the Dow has never lost 50% of its value from a bull market high to the following bear market low, except of course, during the mother of all crashes — the 1929-32 Great Depression.
More importantly, during seven of the 11 bear markets (defined by a 20% fall from the peak), the Dow has bottomed out, with losses between 40% and 50%. And at its panic bottoms made on October 10, the Dow has lost slightly over 44% from its highs made in '07. So, there's a strong reason to believe that the bottom is in place, for any further loss will take us into the Depression zone, which although possible, is difficult to imagine in an era when governments are more proactive in economic management.
The other reason to believe that the bottom is already in place is that after last Thursday's dramatic recovery, in which the Dow rallied over 800 points — that's over 10% in a matter of a couple of hours — a classical double-bottom seems to be in place. As is clearly evident in the second chart, a clear double-bottom is in place, with the lows of the second leg slightly off the lows of the first leg.
What further strengthens the case for this is that even volumes seem to validate the double-bottom, with way higherthan-average volumes on the two bottom days. So, if you go by classical technical analysis, the bottom was formed on October 10, with massive volumes. Then there was a consolidation for about a month, with very low volumes, and then the bottom was successfully retested — again with massive volumes. So, let's hope and pray that the worst is over for world equities and the consolidation phase has started. For, even the perma-bulls on business TV and in brokerages have now turned bearish and there is no way that the market will let them, for a change, be right!
ONCE BITTEN TWICE SHY: While all the above was a frantic and desperate attempt to find the bottom of world equities, which at the moment, looks to be non-existent, it is not of much help to anyone trying to take a trading decision. But unfortunately, we are not going through normal times and the typical indicators have all become useless. In fact, other than telling us that no major shorting has happened and that the nimble-footed bulls have already exited, derivative indicators don't say much.
For, if Tuesday and Friday saw virtually no change in open interest in Nifty November futures, most of the long positions that were built on Monday chickened out on Wednesday. This is clearly reflected by the fact that while Monday's gains saw Nifty November futures add over 13.5 lakh shares in open interest, Wednesday's losses saw them shedding over 12.5 lakh of these. However, this was ironical in many ways, since Wednesday's losses were not even half of what the Nifty lost on Tuesday, which saw almost a negligible unwinding in long positions. However, the fact that even with Tuesday's losses, the Nifty was holding on to the support of 2936 and the twin bottoms of 2860 (made on November 6 and 7) means that for a Nifty bull, Wednesday's relatively lower losses were more damaging than the massive 6% losses of Tuesday.
At the same time, ETIG's smart money ratio (SMR) has successfully
tested support around 60 and is now, once again, headed for the moon. So, the best a bull can hope for is for it to make some kind of a lower high, which will also mean the Nifty makes a higher low. Until then, there doesn't seem to be any case for a long trade, all the above pep talk about the Dow's bottom, notwithstanding. FRESH TRADE: Ironically, even with all the blood bath around, the Nifty is by no way, oversold. So, a dead cat bounce, solely on the basis of an oversold market, doesn't look possible — this further rules out a long trade. Hence, until 2936 is recaptured, the way to go about it is to go short, with the first stop-loss at 2860 and the second one at 2936. However, if all the above analysis about the Dow means anything, then the best things to do, in the order of preference, are: stay out, just day-trade or go long above 2860, with a stop-loss at it.
shakti.patra@timesgroup.com
Above all else, the most compelling reason to believe (rather pray) that the Dow has hit a permanent bottom is that any further losses will take us to unchartered territories and will signal nothing short of a Great Depression — which, I am sure, none of us wants to see in our lifetime. And if the Dow has bottomed out, there's a fairly good chance that the Nifty may have already hit a bottom.
WHY HOPE? Let me make it further clear that at the time of this edition going to the press, the Dow was trading with losses of over 240 points. So, it is very much possible that it collapses big time on Friday, making this article the most ridiculous in history. However, ignoring these consequences, let me tell you why I would like to believe that the Dow's bottom is already in place. As is evident from the adjacent chart, since the beginning of the 20th century, the Dow has never lost 50% of its value from a bull market high to the following bear market low, except of course, during the mother of all crashes — the 1929-32 Great Depression.
More importantly, during seven of the 11 bear markets (defined by a 20% fall from the peak), the Dow has bottomed out, with losses between 40% and 50%. And at its panic bottoms made on October 10, the Dow has lost slightly over 44% from its highs made in '07. So, there's a strong reason to believe that the bottom is in place, for any further loss will take us into the Depression zone, which although possible, is difficult to imagine in an era when governments are more proactive in economic management.
The other reason to believe that the bottom is already in place is that after last Thursday's dramatic recovery, in which the Dow rallied over 800 points — that's over 10% in a matter of a couple of hours — a classical double-bottom seems to be in place. As is clearly evident in the second chart, a clear double-bottom is in place, with the lows of the second leg slightly off the lows of the first leg.
What further strengthens the case for this is that even volumes seem to validate the double-bottom, with way higherthan-average volumes on the two bottom days. So, if you go by classical technical analysis, the bottom was formed on October 10, with massive volumes. Then there was a consolidation for about a month, with very low volumes, and then the bottom was successfully retested — again with massive volumes. So, let's hope and pray that the worst is over for world equities and the consolidation phase has started. For, even the perma-bulls on business TV and in brokerages have now turned bearish and there is no way that the market will let them, for a change, be right!
ONCE BITTEN TWICE SHY: While all the above was a frantic and desperate attempt to find the bottom of world equities, which at the moment, looks to be non-existent, it is not of much help to anyone trying to take a trading decision. But unfortunately, we are not going through normal times and the typical indicators have all become useless. In fact, other than telling us that no major shorting has happened and that the nimble-footed bulls have already exited, derivative indicators don't say much.
For, if Tuesday and Friday saw virtually no change in open interest in Nifty November futures, most of the long positions that were built on Monday chickened out on Wednesday. This is clearly reflected by the fact that while Monday's gains saw Nifty November futures add over 13.5 lakh shares in open interest, Wednesday's losses saw them shedding over 12.5 lakh of these. However, this was ironical in many ways, since Wednesday's losses were not even half of what the Nifty lost on Tuesday, which saw almost a negligible unwinding in long positions. However, the fact that even with Tuesday's losses, the Nifty was holding on to the support of 2936 and the twin bottoms of 2860 (made on November 6 and 7) means that for a Nifty bull, Wednesday's relatively lower losses were more damaging than the massive 6% losses of Tuesday.
At the same time, ETIG's smart money ratio (SMR) has successfully
tested support around 60 and is now, once again, headed for the moon. So, the best a bull can hope for is for it to make some kind of a lower high, which will also mean the Nifty makes a higher low. Until then, there doesn't seem to be any case for a long trade, all the above pep talk about the Dow's bottom, notwithstanding. FRESH TRADE: Ironically, even with all the blood bath around, the Nifty is by no way, oversold. So, a dead cat bounce, solely on the basis of an oversold market, doesn't look possible — this further rules out a long trade. Hence, until 2936 is recaptured, the way to go about it is to go short, with the first stop-loss at 2860 and the second one at 2936. However, if all the above analysis about the Dow means anything, then the best things to do, in the order of preference, are: stay out, just day-trade or go long above 2860, with a stop-loss at it.
shakti.patra@timesgroup.com
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