Tuesday, July 22, 2008

Government Wins Vote, Loses Credibility

The Government today won the trust vote. Big deal! They managed to win the trust vote by 19 votes. 275 votes were cast in favor of the government, 256 against and 10 abstentions. While stability in the government was retained, our 'honorable' Members of Parliament made a mockery of themselves and the voting process on live television. Talks of MPs being ‘bought’ were now made public with three MPs claiming to have been bribed to abstain from the vote. The charges, whether true or not, have made us realize what all actually happens in politics (as if we didn't already know). The government, for sure, has won the vote, but lost its credibility, in the eyes of the ‘aam aadmi’ (common man).

The Nifty went up today too making it four consecutive days of ‘decent gains’ in a bear market. The Nifty opened flat in the morning but after news of Omar Abdullah’s National Conference (having 2 MPs) decision to support the UPA government came, the market started going up, solely because the support of those two MPs would have seen the government through the trust vote successfully. Since then the markets have been up only (except a small pullback to 4200) and managed to close on a high too. 80 points above yesterday’s close and 40 points above the top of the range which was at 4200.

Nifty Tick by Tick Chart - Head and Shoulders Pattern

Seen above is the tick by tick chart of the Nifty for today from 12:30pm onwards, which was taken from the NSE website. Clearly seen is a bullish head and shoulders pattern formed in the Nifty which has been marked on the chart. The pattern has already been confirmed and gives us a target of 4300 on the Nifty which happens to be 60 points away. Hopefully, that target should easily be achieved on opening tomorrow.

Nifty Daily Chart - Bear Market Rally or New Bull Market?

Attached above is the daily chart of Nifty which shows the kind of rally we have seen in the last four days. It has now risen more than 11% in the last four days, has crossed the downward sloping trendline on the daily charts, has moved out of the range and now has managed to close above its most recent pivot high of 4215. Is this a bear market rally or the beginning of a new bull market? Well, it certainly looks like a new bull market but I wouldn’t advise my readers to be too sure about it. My reasons are that new bull markets are born on pessimism and the new bull market rallies would never be as sharp as the one we have just seen. Secondly, a very common phrase in the stock markets is to buy on rumours and sell on news. We have seen the market moving up on hope that the government would win the trust vote. Now that is public knowledge and the smart investor may now be looking to book his profits rather than building a position. Thirdly, a true confirmation of a bull market is when the market is making higher highs and higher lows. As yet, we have just seen a higher high but not a higher low. A correct strategy would be to wait for a pullback and then a rally for two days to see where the new pivot low is formed. If the low formed is above the previous low of 3790 then it may mean that a bull market has started but if the pullback goes lower than 3790 then there may be more pain left.

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