Sunday, May 25, 2008

Nifty Breaks Important Support

Before I start this edition, I must apologize for not being able to post my views on this blog on Thursday night for Friday due to some personal problems. Rest assured, I’ll try to be as regular as I’ve been in the past. I’ll continue with my plan to post a newsletter for every market day and an extra on a weekend. The Nifty, on Friday, did open slightly in the green but soon started losing ground. It managed to hold on to the support between 5000 and 5050 for a couple of hours but soon after noon it started slipping quite heavily and from there it was a unidirectional decline for the Nifty.

The chart of the Nifty has suddenly changed in the last two days. If we ignore the last two candles in the chart, we can see that we were pushing against the resistance line and the blue candle had a long lower shadow which showed that the price did go down but buying came in at lower levels and that actually took the price past the day before’s close. Suddenly, that day was followed by two red candles which changed the chart completely. Now we have broken through the support line near 5000, as signified by the solid green line, which is highly negative. A lower high is now already in place and below 4913 we will have a lower low too, thus signifying the start of a new downtrend according to the Dow Theory. According to the trendline theory, we have now entered an intermediate term downtrend. The target for this downtrend may be somewhere between 4500 and 4550. However, support also comes in at previous lows of 4913, 4630 and 4470. There is a reasonable good support at current levels near 4950. It is important that the previous low of 4913 is not broken if we are want some stability in the markets.

A lot of the current fall in the markets has been attributed to inflation which has been on the rise due to the jump in prices of crude oil. Crude Oil has almost doubled in the last 10 months and the jump has been exponential in the last two months. What actually has been happening in crude oil? Is it likely to come down? Well, some people say it is likely to
come down now and there are others who say a price of $150 per barrel is likely in the next few days. Who do we believe? The best thing, I would believe, is to look at its chart and decide for ourselves.

Given above is the daily chart of crude oil futures as traded on the Multi Commodity Exchange (MCX). The price is in Rupees but the chart, whether in Rupees or in Dollars will remain the same. As seen in the chart, the thick red line is the line chart (close) of crude oil and we can see that it has now found some resistance near 5650 near the blue line. We can see that the support trendline is too far down near 4800 (which will reach 4900-5000 by the time the price comes down). A fall to 5000, though, may not be possible but a fall to 5100-5150 is likely. 5150 also happens to be the 23.6% Fibonacci retracement level of the rise seen from the February lows. That would correspond to roughly $120 per barrel. Also embedded on the chart in the gray line is the chart of Gold futures on MCX (the scale for Gold has not been shown). As seen by the chart, the price of both Gold and Crude is moving in tandem and a fall in crude could also make the yellow metal cheaper.

Buying should be avoided for now since the short term trend is now down and it is likely that the intermediate trend may also turn to down, if it already hasn’t. Keep strict stops on all open long positions.

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Happy Investing!!!