Dec 14, 2010

About correction and more-2

About correction and more-2
(Please click on below link to Read "correction and more -part 1"
Many investors complained us that we didn’t throw enough light on ‘correction’ thing in our previous post.
Well, let’s start by defining.
To go further into anything which has attributes of understanding we must define it.
What is the meaning of correction?
We take it like this. It says ‘correction’ literally meaning ‘something of a process or act of correcting i.e. making it right which is or was hitherto wrong. But when we apply this definition or meaning to word correction and its use in markets, we do not see integrity.
{Because the word is used only for declines in prices and it is never used when prices are rising! (This translates that when markets rise after falling on wrong note, it should be called a correction!)}
……This is interesting with respect to how we want to understand the meaning. Mind it. This is not a time pass or ‘intellectual jargon busting’. We believe this whole contemplation will take us through the understanding of markets and its behaviors…….

So when there is any excess of increase in markets, it is ‘incorrect’ and need to decline i.e correct.
But as in everything with the markets, correction is also not perfect or efficient or which can be defined in perfect positive or negative correlations.
There are no absolute and all-time uniform  thumb rules market directions and same with this ‘correction’ component of market.
Take the case of the ongoing post-diwali declines in the markets. We have seen banking stock, which rose one way, declining upto 20%, but that’s nothing. If the correction has to end with nifty around 5500, then the contemporary heaters of markets such as banking and auto will continue to shoot up to take markets to new highs of indices and heights of euphoric bull sentiments. While the IT and cement pack from indices will give steadiness if not contributing to rise. While pharma and fmcg likely to contribute where as the other hitherto underperforming counters will at least come to their pre-diwali levels.
Looking for the element and proportion of ‘consolidation’ element in any correction is important. This helps us in figuring out how long the correction will last, what sectors and stocks to trade in, and what would be the magnitude of the correction.
Another thing also to look into any correction is that it is one a ‘one day off’ or a couple of weeks decline.
It should persist through two derivatives expiry with zigzags and bouts of big rises with thin volumes on the upside. We also see days during these on which individual stocks/sectors get hammered or prepare to get hammered when markets are just about steady. The next day likely follow with a 1-3% decline.
Ultimately, try to compare the benchmark indices behavior in terms of declines and range of trading, with several stocks and sectors as a whole as well. Because this is what give us the overview of general condition of market trend.
Keep looking for additions…


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