Tuesday, July 8, 2008

Left Withdraws Support, Markets Rangebound

With the Nikkie down 225 points down and the Hang Seng down roughly 350 points when our markets opened, our market was bound to open with a downward gap. The Nifty lost about 100 points in the first five minutes itself. The Nifty hovered around those levels for the next couple of hours and then started inching its way up. It had recovered only about 80 points from its lows when the news came out that the Left front had withdrawn support from the government over the nuclear deal issue. That caused the Nifty to come down again but the news was taken rather bravely by the market and by closing the Nifty had lost only 40 odd points.

Nifty 60 Minutes Chart - Rangebound Markets

It is clear now that the Nifty will remain inside a narrow range for sometime. Attached above is the 60 minutes chart of the Nifty which shows that it has now been moving within a narrow range between 4100 and 3850. One can also see that the last two troughs saw a low being made near 3900 which acts as another minor support. Confirming that the Nifty is going to stay within the range is the Relative Strength Index (RSI), which has been consistently finding resistance near 60 and support near 40 as indicated by the green arrows. A stock or, for that matter, an index can remain inside a range for hours, days and even weeks. We don’t know how long this range is going to be but since it is a very narrow range, it should be broken soon. A move outside the range should give a movement of about 200 points, depending on which side it breaks out on. While no positions are advised till the Nifty remains within this range, yet buying a 4100 call and a 3900 put (July expiry) should be a good strategy at the moment. With the Nifty at 4000 today, both should be fairly cheap. At closing, the 4100 call was available for Rs.80/- while the 3900 put was available for Rs.150/-. It amounts to an investment of Rs.230/- for unit of Nifty or Rs.11500/- per lot of Nifty. On breakout, the losing position should be closed while the other should be carried on. Since the target after breakout is only 200 points and the investment is Rs.230/- one should not expect a lot of profit from this but this is fairly safe. And if the breakout comes soon, one may gain more than expected because the time value would still be there in the option prices.

Let us talk some politics now. The Left withdrew support and yet the market went up. Why? Well, mainly because the government has already got the support of the Samajwadi Party and while it still falls a few votes short of the magic number, it may be able to get the support of a few independents and small parties before the vote of confidence. There are a lot of positives from the developments today. Firstly, the government has announced that they will go to the IAEA with the nuclear deal. If the deal goes through it will be a big positive for the markets. The Left withdrawing support may actually turn out to be good for the government. With the Left providing support, the government had not been able to introduce any reforms in the last four years. With the hurdle now out of the way, the government may actually be able to do something good for the country, provided the Samajwadi Party does not act funny. An early election would mean elections in November while according to the normal schedule elections are to be held in April-May 2009. So, a six months early election won’t be very materialistic for the markets. In fact, an early election may be good for the markets because it only reduces the time of uncertainty (except that then it could jeopardize the nuclear deal). The Prime Minister, Dr. Manmohan Singh, who is now in Japan attending the G8 summit has sent signals home that the Chinese may not oppose the nuclear deal and if the government continues the deal may go through. The US has already committed that it will help lobby India’s case with the Nuclear Suppliers Group (NSG). So, there are a lot of positives today. A lot of small investors understand the Left withdrawal to be a negative but it is more of a positive than a negative.

At the time of writing this post, the European markets are between 1 and 2% down while the Dow is about 50 points in the green. But a big positive is that the crude is slipping. It is already down to $136 a barrel and with such a sharp fall it seems the uptrend may now have ended. A proper analysis of crude would be done in tomorrow’s post.

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