Nifty Weak Below 3800

There is nothing much to say today. I had a look at a lot of charts today. I saw the 30 minutes chart of the Nifty, the 60 minutes chart of the Nifty, the daily charts, the weekly charts, the monthly charts, had a look at the charts of various stocks too,and yet after having seen all those, I am still at a loss for words. I honestly do not know what is going to happen tomorrow or in the coming days. All I know is that from the charts of the stocks that I had a look at, things aren't looking too rosy. That obviously does not mean that things are looking bad. I can't say whether things are bad or not but they are definitely not good.

As far as the Nifty goes, I have attached the daily chart of Nifty on top. There is not too much to discuss on this too except for the last four days. As marked by the green rectangle, the prices have been moving within a small range between 3800-4000. Four days is too short a time on the daily charts to term it as a range bound movement, yet the rules/fundamentals of rectangles or trend channels do apply here. i.e. the top of the range at 4000 should provide resistance whereas 3800 should provide support. In case 3800 is broken, there is some minor support available at previous lows at 3777 and 3715 but a major support is not seen till 3635. While an intraday movement of below 3800 can be expected, a close below 3800 will be bearish. The ADX indicator, which measures the speed of a trend has also reached 24 after attaining a low of 11 which indicates that the speed of the downfall/downtrend is picking up. It pays to be cautius.

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Trending Move May Come Soon Enough

The Times of India newspaper on Sunday came out with a very interesting headline which read “India N-abled” With the NSG giving their decision in favour of India, the 34 year long period of ‘nuclear apartheid’ has ended for India. The report also said that India now has the unique status of being the only nuclear weapons power to be allowed global nuclear commerce without signing either the Nuclear Non-proliferation Treaty (NPT) or Comprehensive Test Ban Treaty (CTBT), which until now was a precondition for entering the elite nuclear club.

Ex-president and a prominent nuclear scientist, Mr. APJ Abdul Kalam says that the NSG waiver is good for India and that the country can choose to break the ‘voluntary moratorium’ on further tests in ‘supreme national interest’. He does not talk about the implications, though. Maybe, that would lead to another few decades of nuclear apartheid, but come to think of it, if that does happen we would not be any worse than what we already are. So, this NSG waiver is in the ultimate national interest of the country. This should be good news for the markets and we may see them go up on Monday, which may, eventually, take us outside the upper end of the range at 4650. According to Mr. Sudarshan Sukhani, the reality is that the deal itself is just a small help to the massive task of uplifting Indian poor to a better standard of living and that it is likely to play an insignificant part in the removal of poverty. Yet, he feels that the reality to be realized by the markets could take long enough to give us time to break out of 4600-4650 zone and reach 5100-5200 levels.

Seen above is the daily chart of the Nifty. I have added a lot of tools to the chart today and I hope it does not become very confusing for my readers. Superimposed on the prices, in brown, is the Moving Averages Convergence Divergence (MACD) which shows that it is now close to its signal line and has still not decided whether to go above these levels or to come below those. Hopefully, we should have an answer in a day or two, though the positive news already seems to have given the answer. Second, I have marked the recent range within which the Nifty seems to be moving, i.e. between 4200-4650. As is obvious from the range, there is support at 4200 and resistance at 4650. We can get a tradeable move in the intermediate trend only if the market were to come out of this range, upwards or downwards. Third, I have drawn a downtrending line marked AB which will provide resistance to the prices if it does decide to break above the upper end of the range at 4650. Fourth, I have drawn a line parallel to AB and have marked it as CD. This line, as can be seen, has been providing support/resistance at various levels in the last eight months. Surprising how just a line parallel to a trendline can do that. The most recent resistance was provided at 4515 on Thursday. Will it provide resistance again tomorrow or will this line be crossed and then become the support, is yet to be seen. In the bottom part of the chart I have attached the ADX indicator which, as mentioned in earlier newsletters, reflects the speed of a trend and extreme levels, such as those below 15, represent that one particular trend may now pick up momentum and the markets could follow that trend. However, it fails to give the direction of the trend and other indicators have to be seen to ascertain which way the trend is likely to shape up. The simplest way to find that out is to see which side of the trading range the Nifty breaks out on. The ADX value for the Nifty on Friday was 11 and never has the ADX reached such extreme levels, at least not in the last two years. We should soon see a big trending move come about.

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Nifty Breaks Symmetrical Triangle On The Downside

The Nifty opened with a small upwards gap today and almost immediately started losing ground. It then went into a very narrow range of about 20 points and kept trading in those levels for the better part of the day. The bears, finally, took the index below that narrow range of 20 points when only an hour of trading was left and the index ended the day about 45 points in the red. The result is still the same, the Nifty locked inside a range of 4200-4650. As mentioned in earlier posts, a clear trend would come about if this range is broken on one of the sides. Or when the ADX indicator line starts rising again. This line was showing a value of 15 yesterday and today it has fallen further to 14. Such extremes are rare in the ADX and this clearly shows that a trending should now come about soon enough.

If we look at the charts in the posts written yesterday and the day before that, we would notice that the Nifty first made a gravestone doji (a bearish signal), and the next day it formed a dragonfly doji (a bullish sign) and today it fell down. A number of days before those dojis too it had been making red and blue candles on alternating days. A clear signal that the markets are confused and do not know which direction to take. That explains the narrow range that we are locked into.

Seen above is the 30 minutes chart of the Nifty and shows the short term trend of the market. As seen above this narrow range that the Nifty was locked into during the last one week was in the form of a symmetrical triangle. The apex of the triangle was reached today and the Nifty saw a breakthrough on the downside. The target for this breakdown is close to 4160. It is quite possible that the Nifty may complete a pullback to 4370 again before falling further. That rise could be used to take short positions (or to exit longs) in the short term.

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Nifty Trend at the Slowest This Year

The Nifty opened weak today and remained flat for the next couple of hours today. It was only at noon that the upmove started and except for a small three quarters of an hour long correction at about 1pm, it remained a unidirectional move for the Nifty from 12 noon. This move was so good that the Nifty, which was about 50 points in the red, managed to close 2 points in the green before the day ended. In the process, it formed another doji and this time it was a dragonfly doji, generally a bullish sign. This is what Street Authority says about a dragonfly doji.

Seen above is the daily chart of the Nifty along with the Directional Movement ADX Indicator. As mentioned in earlier posts, the Nifty is locked inside a trading range inside 4200-4650, as is shown in the green rectangle. The directional movement ADX indicator is the speedometer of a trend. Like the speedometer of a car measures the speed of the car, the ADX indicator measures the speed of the trend. We get a rising line when a trend is in place, irrespective of whether it is a downtrend or an uptrend, and a falling one when the market slows down and is going through less volatile patches. Values below 20 means that the markets are currently inside a trading range and a move outside the trading range should be profitable. Values above 25 should be traded depending on the direction of the trend. Values between 10 and 15 are considered to be extreme values and rarely does the ADX indicator fall below this range. A rising line from these levels seen in conjunction with a breakout may be a good time to enter the trend.

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Small Range Between 3940 and 4110

The Nifty opened with a big bang today and soon reached near its earlier pivot high of 4105. The Nifty made four attempts during the day to cross that barrier but it proved to be a very tough resistance. Finally, in the late afternoon trade, after news came in that there was a suicide bomb attack on the Indian embassy in Kabul, the market started falling. It fell pretty sharply for whatever time was left in the session and let the Nifty close with gains of only 14 points during the day.

Seen above is the 30 minutes chart of the Nifty which shows that the Nifty went through the resistance line with a bang today on opening bell itself but that is where the problems started for Nifty. It reached its previous resistance which happened to be the pivot high formed last week. After trying to go past the resistance for most of the day, the Nifty failed to do so and fell sharply in the afternoon. As shown by the green lines, the Nifty is now in a range between 3940 and 4110. The ADX indicator which is still below 20 will remain at low levels till the Nifty remains within this range. A breakout from this range – either up or down should take the ADX to levels past 30. What is to be noted is that the ADX indicator on the daily charts is still at 51. For the Nifty to change its direction, the ADX should first slow down to levels between 20 and 25 before going up again. A prolonged stay within the range for a few days should do that for the Nifty. For now expect a short term uptrend above 4110 and a short term downtrend below 3940/3850.

I had to go out somewhere and came back late. Since it is now very late in the night, I won’t go into too deep an analysis and just rest my pen here tonight.

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This Rally May Fizzle Out

The Nifty had a good day on Friday too. With a fabulous 200 point increase in Nifty on Wednesday and all its gains being washed away on Thursday, Friday turned out to be a good balm for the wounds of Nifty. A 90 point increase in the Nifty came at a good time but the move up was gradual and interrupted by regular corrections during the day. Inflation was a major worry and with inflation moving up to 11.63%, the market started coming down but not for long. The next move up took it past the earlier highs of the day but then it went into a 40 point range between 3980 and 4020.

Seen above is the 30 minutes chart of the Nifty along with the Directional Movement ADX indicator on top (green colour with red horizontal lines) and the Relative Strength Index (RSI) at the bottom (red colour with blue horizontal lines). The ADX indicator, as mentioned in yesterday’s post, measures the strength of a trend while the RSI measures the strength of a stock/index with respect to its historical prices. As seen from the chart, and as marked by the green arrows, every successive low in the Nifty saw a reduction in the strength of the trend, as measured by the ADX. Now the ADX is at a level of 15 and below 20 it does indicate that there is no trend in the market except sideways. This gives us an indication that the downtrend may have been over.

So, are we in an uptrend now? Not yet. As mentioned in a previous post, a short term uptrend shall be confirmed only if the Nifty were to go above 4105. We would get an early indication that the trend has changed if the Nifty were to go above the downward sloping trendline. The RSI finding support near 40, as marked by the green circle, also gave us positive indications about a forthcoming uptrend. Unfortunately, things change fast where the markets are concerned. With a 90 points increase in the markets, anybody would say that a short term uptrend will come about. However, the charts suggest differently. The move, as already mentioned, was slow and lacked momentum and, though the prices managed to cross the trendline, there was no excitement/large range candle associated with the breakout, which gives me doubts whether the breakout was genuine or not. The RSI finding resistance near 60, as marked by the brown circle, and failing to go above it also makes one wonder whether an uptrend will come now or after another brief correction.

At this moment, I’m afraid, this increase in prices may fizzle out once again. We may see another fallback to the lower trendline to 3920 or upto the previous lows below 3850 (or even lower??) before we make another attempt at a pullback. A move below 3875 will signify that we are back in a downtrend.

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The World Around Us

Today is a weekend and on weekends I, usually, write about general things for which I don’t get time during the week. On previous occasions, I have written about mutual funds, the US Recession, Retirement Planning, Greed and Fear, Renewable Energy, Price to Earnings Ratios, Rules for Analysing Charts, why technical analysis works, Fibonacci Techniques and have done a couple of webinars also. The whole week a question keeps propping up in my mind that what am I going to write about this weekend and sometimes my mind draws a blank and I don’t know what to write about. Today happens to be one such weekend. Maybe you readers can give me some ideas about what I should write about. Just send me a list of topics about which you need some more information and I can keep picking up a topic from the list and every weekend I can write about a different topic. I hope to get a list which could last me 2-3 months. So please send in your lists today.

Though, I didn’t know what I should write about, but then I thought why not write about something which seems to be driving our markets. And in my opinion, there are three things that are driving the Indian markets, namely, inflation, crude prices and the American markets. Inflation, I feel, is more because of the shooting commodity prices the world over rather than being an Indian phenomenon. The government is trying to control inflation by regulating the supply of commodities or by raising interest rates but when the inflation is driven by external factors how can we control it with these measures? Though, I’m not much of an economist but I feel there could have been better ways to reduce inflation than this. I’m shocked at how horribly wrong the Govt. was. According to this news report the Central Government had said on April 19, 2008 (when the inflation was 7.14%) that they would bring down the inflation under 5% in the next two months.

Well, about crude prices the sky seems to be the limit to which the crude prices can go? Will this never end? Will crude go to $200 a barrel? When I don’t understand anything I make use of technical analysis. But I have done the technical analysis of crude in an earlier post too with the help of Elliott Waves and had suggested that crude could make a high near 6300 or $148.50. Things have changed today. Crude, after a $10 jump that day slowed down and is now gradually inching up. This gradual increase has pushed the target upto between 6500 and 6600 (in rupees), which means it could go upto $157 a barrel. But I also saw the short term chart of crude and I found it to have some similarities with the chart of the Nifty. Let us see how.

Seen above is the daily chart of the Nifty showing the period between November 2007 and January 2008. Significant in this chart is the presence of dojis. I’ve mentioned in numerous other posts that a doji is a day when the open and the close of the day is the same or is very close to each other. In this case, the candle that is formed has an upper shadow and a lower shadow but a non-existent or a very small body. All such dojis have been marked in the chart above with green arrows. Dojis are signs of indecision/confusion. Such indecisions and confusions cause a strong trend in the market to slow down and then reverse. This is exactly what happened in late January after a series of dojis were seen in late November, all of December and the initial part of January. Another thing to note in the chart is the presence of the ADX index which measures the strength of a trend. A strongly trending stock/index will show higher values of ADX while a trend slowing down or a stock/index going through a consolidation will show lower values of ADX. This ADX, which was as high as 47 in late October came down between 15 and 20, when the Nifty actually reversed.

Let us look at the crude chart for the period between mid May and now. The similarities seen are obvious. This chart also has seen a number of dojis in the last two months, though, may not be as many as were seen in the chart of the Nifty. Looking at the ADX indicator, we can see that here too it made a high of 47 and then came down to levels between 25 and 30 and is now at 33. The striking resemblance between the two charts shows us that the high for crude oil may not be very far off. What also cannot be ignored is the presence of so many red candles. The chart looks more red than blue even though this chart is of a period when it has been in an uptrend.

And lastly, let us take a look at the American markets too. Seen above is the chart of Dow Jones Industrial Average for a period of last one year. We can clearly see that the trend has been downwards. The chart currently shows no indications of the downtrend finishing or an uptrend building up. But there are a couple of things which I want to share with you. The first is the trendline drawn from June 7, 2007 till date. This trendline shows that there may be support nearby near 11100. And a one year long trendline, which has been tested 4 times in the past should provide a pretty strong support. Secondly, the Relative Strength Index (RSI) is currently near 20 and considering that the downtrend has been in place for the last 9 months, a level of 20 is highly oversold which has never been seen in the last year, at least. Both these things show that a support, could only be a short term support, is nearby. And that is what we are expecting with the Indian markets too. More downside possible but a short-term low may have been formed.

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