Technicians define a "selling climax" as a period when a big price fall comes upon a huge volume expansion. Normally, price falls are accompanied by falling volumes. It's a danger signal when volumes rise a little on a sell-off because that indicates there is more supply than the market can absorb. It means prices will fall further.

However a selling climax is different - volumes multiply rather than rise a little. Volume multiplication often means that the selling is over and done with at one shot. There are no sellers left post-climax. The aftermath is light volumes and flat prices.

There is usually little demand so, prices don't recover immediately. But there are no further falls either. In a post-climax situation, an investor can accumulate stocks for an extended period without much price change.

Was Friday's crash a selling climax? There was enough volume for it to qualify. But we won't know for sure until the next 10-15 sessions of trading. If it was a climax, price volatility will drop and so will volumes. The market will level off close to current price-points and rise only when demand reappears.

If it wasn't a climax, there will be high price volatility and swings in both directions. In that case and it is rather more likely, an ordinary correction will knock the Nifty down to 4200-4300 levels. A big correction, alias a new bear market, will perhaps mean a bottom in the 3000-3200 range after a fall over an extended period.

The trader and the long-term investor must be prepared for all three possibilities. For the trader, non-climax situations are preferable. Traders thrive in high activity markets - price direction is secondary though bull markets generate more moves than bear markets. A trader could hope to profit on the swing and then again when the market moves up.

A long-term investor will have a more equivocal reaction. A selling climax means the current portfolio is not likely to see severe depreciation. A 10 per cent correction would offer a chance for an investor to average down without much discomfort. A 30 per cent drop is a two-edged sword. The notional profits of the past year evaporate. But there is a big opportunity to create fresh positions at much lower cost.

The market's subsequent behaviour will to a large extent, be dictated by relative cash positions of traders and investors. If the traders have a lot of cash, they will create price swings by trying to exploit the current trend.

If investors have a lot of cash, they will welcome a deep correction. They will wait for prices to bottom. If on the other hand, investors are fully-committed as a group, they will sell to lock profits. That will trigger a deep correction by way of Catch 22.

I would assume that most retail traders and small investors have been flushed out by yesterday's correction. But the real game will be played at institutional level. As far as FIIs are concerned, cash isn't a problem. The world is awash with liquidity.

However, hedge funds - that is traders - contribute a very substantial portion of FII inflows. The hedge funds have increased commitments through the past year because of the rupee appreciation cushion. The rupee fell last week.

Will the hedge funds run for cover or stay to trade the swings? I think they'll stay because of the high rollover numbers on Thursday and because 37 per cent of NSE's Friday turnover in derivatives was FII generated.

As far as domestic funds are concerned, according to data sourced from Value Research, equity fund managers controlling assets of about Rs 1,05,000 crore (Rs billion) have just about Rs 6,500 crore (Rs billion) of cash in the kitty. A 6. 25 per cent cash position suggests that they are unlikely to be comfortable about a big correction. That could mean more selling.

There is another question. Is India worth investing in at current levels? On 2006-07 earnings, the Nifty is valued at a price-earnings (P/E) multiple of 20. 9 with a dividend yield of about 1 per cent.

The Q1 FY08 earnings trend suggests that EPS growth will slow to about 13-15 per cent this fiscal. The price-earnings growth ratio isn't attractive. Nor does the P/E appear brilliant on the basis of double-digit interest rates. A deep correction would much improve the value equation.