Contrarian Approach to markets

Today most market participants including us were surprised by the sudden outburst of the markets. There was no apparent positive trigger and markets moved up by 3 percent backed up by an amazing advance decline ratio and significantly better than average volume. Have the markets finally resolved the impasse and will break out of the range (4800 – 5180 of Nifty) on the upside. Judging by the market action perhaps, the answer is yes. However the important question is how do investors and more importantly traders catch these rallies or break downs that come without any forewarning. As with nearly all things connected with markets there are no clear and definite ways of doing this. However a contrarian approach can sometimes provide good clues to these unexpected break outs or break downs.

For the last couple of days nearly all visible analysts, especially on the technical side had turned negative. Moreover there was also a consensus opinion that markets will remain range bound till at least the end of the year. December is usually a dull month is what everybody mentioned as there reason for concluding that at least the upside for the markets was restricted for this month. FIIs were in a holiday mood and usually we do not attach too much importance to domestic money flows anyway. Aggressive shorts and call writing was being done by market participants. A contrarian call would obviously have been to go long with an appropriate stop loss. This is what had prompted us to suggest a positive outlook based on market technicals yesterday. Not too say that we were in any way anticipating this solid upmove. However, with so many negative noises all around and no real downside trigger going positive for the near term was somewhat making sense.

Good amount of trading gains can always be made by being examining the markets in a dispassionate way and going reverse of whatever appears to be a foregone conclusion.