Base Building and a big red candle

As we expected, it was a very volatile week. All markets had a major crash in the middle of the week with the DOW and FTSE recovering on Friday. Asian markets have started off strongly today.

The end of this correction is in sight. However before the new rally begins, a base will be built. The lows that we have made over the week might be tested. If we look at the charts, we don't see a candle, ie, the close was not at the lows but rather the lows were intraday.

With this structure we can visualise 2 scenarios:

1. The lows that has been formed will be revisited, ie, a new low or very close to the previous one will be made. This will be marked by a big red candle on a weekly or daily chart. This means that the close will be at the day's low unlike what we saw in this week.
   
2. The lows that have formed will not be breached but a quiet period will follow in which the market will oscillate in a narrow range at last week's close. This is called volatility compression. This will be marked by a series of smaller candles on a weekly or daily chart very close to this week's close.

We will wait and observe the market for either of these structures. Our preferred view is the first option listed above. Ideally speaking we should form this either the ensuing week or the next.

We also used yesterday's lows, to pick up some index funds(HDFC Index Fund and HDFC Index Plus Fund) and midcap funds(Sundaram BNP Paribas Select Midcap)on the Indian markets. This corresponds to 50% of our allocation for mutual funds. We will most probably increase our short holdings in the US market over the course of this week.