Has the recent volatility changed market trend?

A trend change is typically not used to initiate or remove trading positions as much as to signal a possible modification in the ‘trading bias.’

To put it another way, it’s like throwing a stone into a placid pond. It causes a ripple. Sometimes it’s a large stone and it causes a large ripple or multiple ripples. Sometimes, it’s a small stone, yielding a ripple so minor that it is barely noticeable.

Hence, the longer the timeframe observed for a trend change, the more prominence it receives.

Conversely, the shorter the time frame, the less likely that a bias would change.

Parabolic SAR is one such indicator, which helps us assess trend (bias) changes.

Rule 1: When the trend is upward, a dot is placed below. With every rise in prices subsequently, the P-SAR (dot) rises higher, just like a trailing stop loss for a long position.

Rule 2: When the trend is downward, a dot is placed above. With every subsequent fall in prices, the P-SAR falls lower, just like a trailing stop loss for a short position.

Fig 1: A P-SAR plotted on monthly charts of Nifty gives a decent understanding of the current trend, and what level one needs to watch for a possible trend reversal.



Why is this indicator important from a medium-term perspective?

This is a significant indicator to look at, because it can absorb the correction at the end of 2016 (on the back of demonetisation), and it failed to confirm a breakout of the trend. And what happened to the Nifty50 after that is now history.

In the current context, till the time we hold this key support (P-SAR) level, the trend is still intact for positional traders. However, a breach of this level could result in a further 8-10 per cent correction, as is seen on historical inferences of such a trend reversal.
Let me end with this bit of wisdom:

“Big money is made in the stock market by being on the right side of the major moves. The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not.” – Martin Zweig