Justifying a Trade

The Nifty flattered to deceive yesterday. After an initial rally gladdening my heart, the Nifty fell in the last one hour to close at the lows of the day. The Asian markets are weak and I can only hope that today the Nifty will reverse what it did yesterday i.e.  open weak and then rally up in the last one hour.

My long position on the Nifty is as per my trading system and therefore requires no other justification. But it is always fun to try and find reason to justify a position that is already taken. If you think about it almost all of us, in all spheres of activity, decide first based on our own inclinations and proclivities and then try to find some justification for that decision (which is always easy to find given the fact that virtually any action in this world can be justified by the perpetrator of the action) So I looked around and found the usual suspects.

1] This uncertainty surrounding Europe is already in the price (using the killer argument of Efficient Market Hypothesis)

2] The fundamental valuations are cheap (who knows whether they really are but it sounded nice enough to put it out as a reason)

3] The RBI will cut interest rates and this will help push up corporate earnings ( The confidence with which I put this makes it sound like I have just got out of a meeting with Subbarao and he has personally whispered this to me)

4] The RBI will cut CRR (same meeting .... same confiding in me)

5] The Rupee has already depreciated and will now appreciate and FIIs will buy to take benefit of this rally (completely circular logic but will do for now)

6] Last 10 Decembers have been positive for the market and this December will be too. (does not look at what the 10 Decembers prior to this last decade did and the data is completely statistically insignificant. But the argument sounds nice and we should always go for nice sounding arguments over accuracy)

7] Last but not the least, the Govt is desperate to prove it is not dysfunctional and will do some big ticket reforms (Total speculation but irrefutable by anybody else since nobody can refute what is certainly within the realms of possibility)

Having given seven solid reasons to justify the long positions, I will give you one more based on the charts. In the weekly charts of the Nifty, I see a strong positive divergence. Combine this with a strong rally last week and a follow through this week, we have all the ingredients for a rally lasting 10-12 weeks. The chart is attached in case you feel like checking out my ability to annotate Bloomberg charts!

Having said this, I will cut my long positions on the Nifty and go short if Nifty futures falls below 5022. If it does that, I promise to give a few reasons to justify a short position on the Nifty. I already have it ready for future use!