Here is a look at Sensex, and its relationship with its 50 day moving average, before a significant correction takes place. Column 5 of the table shows how far up the Sensex was from its 50 day moving average before a correction. The minimum percentage by which Sensex must be up from its 50 dma, to induce (!) a reaction is around 6 %. The last column shows the lowest low reached after the correction. We may think that the higher away the Sensex from its 50 dma, the greater must be the reaction, but this does not seem to be the case, as we have a 12 % fall when Sensex was up 6.54 % away, and a 16% fall when it was up 5.9% away. The average % ‘up’ from the 50 dma works out to be 8.99 % and the average % fall works out to be 16%. So can we extrapolate? Take yesterdays high 17953 and deduct 16% from it to arrive at 15073 as the target if a correction happens now!
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