Sunday, May 24, 2009

Nifty P/E Ratio

This afternoon, I was discussing Nifty's recent price movement with another trader friend. His reaction was the same as mine - disbelief at recent price movements!

Even though he is relatively more bullish about overall prospects of Indian markets in the short term -he agreed that the recent one way price action was simply unsustainable over any time frame. Both of us were just thankful that we were not caught with any short positions when the election results came out!!

He showed me his chart for Nifty P/E - which I am reproducing below,. The chart itself is self explanatory - to read the full article please follow the link.

That still leaves us with a question as to what is the best way to trade Nifty in the short term. The downward retracement after the initial burst high has not been sharp enough - Sure, we could still see it this week but the best moves typically come almost immediately after the big move up.. and the probability for a sharp down move decreases with every passing day as the element of surprise is no longer there.

The way I look at the recent price action, there was a lot of open short interest in the markets before the election results were out, as lot of people were expecting a close result with no clear mandate for any party. More than anything else, the insane price action that we saw on the day after election results was a result of the shorts stopping out of their positions rather than anyone entering the market with fresh longs. Moreover, this rally had the effect of short positions having changed hands from one set of traders to another set, who were not short to begin with but saw this rally as a chance to get short at inflated prices. Typically, in absence of fresh longs coming in the market - Nifty should have retraced most of its gains within 2-3 trading sessions of the rally. Since this has not happened, I suspect that there has been some retail long positions entering the market. Now there is still a small chance that downward move could gather steam this week - especially if S&P remains weak during the week as well, However, more importantly, a break of these recent highs would mean that the last of committed bears would throw in the towel clearing the way for a move towards 5000 level.

In terms of immediate levels, please keep an eye on 4185-90 levels - If Nifty closes above 4190 this week as well, then the chances for a break higher would increase dramatically.