Is This the Right Time to Buy Stocks?

Stock prices in the Indian markets have been rallying for 20 days now including today. And this rally today was to be expected after the sharp correction that we saw on Monday. But this much??? No, the quantum of the rally was unexpected. There was resistance near 6040 and then at 6090 and it crossed both effortlessly. The Nifty opened with about a 20 points gap up and made no effort to fill the gap, crossed both the resistances and still continued to rise to finally end the day at a high with a gain of 151 points to close at 6146. 

Stocks Rally: Am I Missing The Bus?

Stocks in the Indian markets rallied for a fifth day in a row today. And this rally today was to be expected after our government won the trust vote in the parliament yesterday. This was to be expected because the Government's win would mean that the nuclear deal will go through (if the NSG and the AIEA do not object). This was good news for the markets because of which the Nifty opened above 4400 and finally ended the day at a high with a gain of 236 points.

I was out today and have just come back home and it is late at night so I won't go into the analysis of charts today. But before I finish, I would like to add one more thing here. A lot of my readers would be thinking that if the stocks continue to rally like this and this does turn out to be a bull market then, surely, they will miss the bus if they do not 'jump in' now. Well, as mentioned yesterday, I would say that this does not seem to be a bull market because the symptoms are not such. But the market can prove us wrong too. It surely can, but even if this is the beginning of a new bull market, this will also have to go through the customary corrections. And it will give us a lot of opportunity to enter. Today's close means that the market has risen 17.3% in just a matter of five days. And that is a big rise in a bear market and a correction has to come in sooner or later. It is just that we are not getting any negative news to trigger a correction. American markets are flat today, European markets closed with gains between a percent and a half to two percent and the Asian markets were also well in the green earlier this morning. Crude continues its downward journey and is now trading at $124.50.

My point is that new bull markets take time to build up whereas it is generally the bear market rallies which are sharp and give us a sense of hope. My point is that a market which has risen 17% in five days would be quick to fall at the first sign of a negative news. A correction of Fibonacci 61.8% can safely be assumed and if we assume today's high to be the high of this rally then that means a pullback to 4060 is possible. Even if it does not fall to that level, I would be more comfortable buying after the pullback is over than now (even if I have to buy a few points higher than what it is today).

Those who think they will 'miss the bus' need not worry because the markets would definitely see a pullback. One must exercise caution when 'jumping in moving buses' because it can lead to accidents and injury. It is wise to 'jump in' when the 'bus slows down' and I am waiting for just that time.

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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.

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.

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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Birth of a New Bull Market?

The resignation didn’t come today. Maybe it will come a few days later. Speculation is ripe that in a week’s time the UPA will meet the Left and inform them (rather than reaching a decision) that they are going to the IAEA (International Atomic Energy Agency) to get an approval on the safeguards text. The Left has categorically stated that it ‘will not allow them to go to the IAEA’. And the moment the Government goes, support would be withdrawn. The Government may not be able to garner enough votes to save itself in the event of a no-confidence motion.

I have pasted above the 30 minutes chart of the Nifty. Formed over the last four days can be seen a small bullish head and shoulders formation on the Nifty. This pattern has been confirmed in the last 30 minutes. I, probably, would have expected a larger range candle in the last 30 minutes to accompany a breakout, but with profit booking possible in the last 30 minutes, a concession could be given. The target for this head and shoulders pattern is near 4430. While we are now in a short term uptrend, to confirm an intermediate term uptrend we need the Nifty to go above 4500. While head and shoulders are more reliable on daily and 60 minutes charts, they are not very trustworthy on 30 minutes/real-time and weekly/monthly charts. Had this pattern been visible on a 60 minutes chart, I would have been more convinced but it is not visible there. Another problem that I see with the pattern is that the Relative Strength Index (RSI) is finding constant resistance at 60, as marked by the circle. Its inability to go into the bullish zone may not be a very bullish sign. But we are in a short term uptrend and with the resignation not expected in the next two days, as a day trader I would be looking to go long, rather than short. As a swing trader/investor I would wait for more confirmation to determine whether this rally is just an aberration or is it for real.

A comment was posted by Sanjay in yesterday’s post asking whether we are in corrective wave C of major wave 4 or otherwise. Well, Elliott Waves Analysis is a very specialized topic and while I have a working knowledge of Elliott Waves, I wouldn’t call myself a specialist. But, as far as my knowledge goes I have tried to do an analysis of the wave counts in the cycle/super cycle degree. I would request specialists of EWs to post a comment (if they happen to chance by this post) to tell us all if our analysis seems to be correct or not.

Pasted above is the monthly chart of Nifty along with the wave counts (as I perceive them). Our counts start from the low made in April 2003 at 920, the place marked ‘0’. In my opinion this wave lasted upto Jan 2004 when it made a high of 2014.65. The wave 2 corrected a little more than 61.8% of wave 1 upto a level of 1292.20 in May 2004. Then started the major wave 3 which ended in Feb 2007 after making a high of 4245.30, which turned out to be slightly more than 261.8% of wave 1 (269.77% to be more precise). One can also see another 5 wave structure in wave 3 as marked by the numbers in brown. The corrective wave 4 was rather a small correction. Wave 2 having corrected 61.8% of wave 1, one would have expected wave 4 to correct 38.2% of wave 3 to a level of 3117 but it managed to correct only 23.6% of wave 3 upto 3554.50 in March 2007. Wave 5, according to me, started from there to end in Jan 2008 at 6357.10. With the wave 5 (2802.60 points) almost as long as wave 3 (2953.10 points), yet falling short of the length of wave 3, it is in conformation to the Elliott Wave principles that wave 3 is usually the longest but never the shortest. So from Jan 2008 till now we have been in the corrective waves A,B,C of the complete bull market cycle. And, we have now, probably, seen the end of wave C after the 3-3-5 pattern that it followed while completing waves A, B and C.

From hereon, if our wave counts are correct, then our previous low of 4093.20 made yesterday should not be broken. However, there is only two things that are worrying me and the first one is the fall of the government. While the market has already discounted the fact that the government would fall, yet a sharp knee jerk reaction could come which, probably, could take us below the previous low. The other thing that is worrying me is the fact that we are only 25 weeks or 6 months into the bear market. Usually, Fibonacci numbers hold a lot of importance in the markets and one of my previous posts mentions how the market made important highs/lows after a specific number of weeks and how that number always turned out to be a Fibonacci number. Going by that logic we should see the end of the bull market in 34 weeks which should not happen earlier than the last week of August.

Let us assume that our above logic is wrong and that our wave counts are correct. In that case a new bull market should start now. But do we expect new highs soon? No. A new bull market will always take time to build up. A long period of base-building will happen in the beginning of a bull market. There is a lot of pessimism when the first wave up of the bull wave is seen and people view it as a bear market rally rather than a bull market. The second wave down reinforces the fear that the bear market is continuing. It is only when this wave fails to go below the previous lows and another rally is seen that people realize that it is a new bull market. That is when the volumes come in and people come and buy in large numbers. Exactly the reason why the third wave is the longest wave. Then a correction comes about and the fourth wave down just cools down the overheated market and makes valuations appear a little more reasonable and the fifth wave starts. Now the people again come out in hordes to buy and think that since this is a bull market nothing could go wrong and conditions become euphoric and one knows that it is all about to end soon. Sir John Templeton, a famous stock investor, has rightly said that “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Right now the conditions are pessimistic, there are rumours of a government fall, I am expecting the markets to stay low till end of August and there are analysts predicting the Sensex to come down to 12000 levels and there are a few analysts who are pessimistic enough to expect 9000 on the Sensex and some like me who once predicted the target of Nifty to be 2600. There is a lot of pessimism around and I am wondering if this is the birth of a new bull market?

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