Ranbaxy Up, R. Com Down, Nifty Yet to Decide

It's been a long time since I wrote last. And there's a good reason for that. I've been bearish on the Nifty for so many days now and there has been no change in the view till now so there was nothing new to mention. Such downsides will not come via a one-way movement and there are bound to be some corrections in between. What we are seeing now is a correction. Now, whether this rally that we are seeing is a correction or the bigger downside was a correction is yet to be seen. This present rally has started showing signs of a much bigger rally that may be coming. One may just have to be careful now and convert short positions, if any, into long positions when the time comes. 

Capitulation Like Symptoms Visible

The Nifty yet again opened around the same levels as yesterday’s closing and started moving up. Yet again, at 11AM, it started coming down, and exactly like yesterday found support in the late afternoon session. But today the support was found 160 points below yesterday’s close of 4040 at 3878. The Nifty finally ended the day 144 points down at 3896. Our level of 3882 mentioned in yesterday’s post held very well today.

In the last few days I have been discussing Elliott Wave Counts on the Nifty and so far the counts appeared to be correct and working as per our expectations. To read what we had written in other posts discussing Elliott waves, one can go to the end of this post and under the section “Other Posts That May Interest You” read the posts listed under ‘Elliott Waves’. Or, simply click here to read all posts which have discussed Elliott Waves. Briefly, I had mentioned that we are, probably, in the 5th wave down of major corrective wave C. While writing yesterday’s post I got confused and had mentioned that wave 5 cannot be longer than 797.60 points which was the length of the 3rd wave down in the corrective wave C. As per the Elliott Wave principles, the 3rd wave is usually the longest but NEVER the shortest. And I got confused into thinking that if the length of the 5th wave is more than 797.60 then the 3rd wave would become the shortest. What I forgot was that even if wave 5 was longer than that, wave 1 would still be the shortest which measured only 385.05 points. And Sanjay rightly pointed out in the comments here that even if wave 5 exceeded 797.60 points, wave 3 would still not be the shortest. Thank you, Sanjay. Usually, if the 3rd wave is the longest, wave 5 is almost equal to wave 1. In some cases, it could even be 1.618 times, 2.618 times or 4.236 times of wave 1 (and in some of these cases wave 5 could then become the longest). This seems to be a case where wave 5 will be the longest. 1.618 times of 385.05 would be 623 points and the 5th wave is already longer than that. The next target for the end of wave 5 would be 2.618 times of wave 1 (385.05 points) which is 1008.05 points which works out to a target of 3671.70. God save us if it extends to 4.236 times of the first wave!

I have the daily chart of Nifty uploaded today, as seen above. This chart is the same as yesterday, except being updated with today’s candle. As can be seen from the Bollinger Bands, today’s close was outside the limit of the lower band and this means that the downtrend would continue. Our analysis of the Elliott Wave Counts already suggests that we are looking at a target close to 3672. A quick run through the charts of various large caps and mid caps tells me that almost all stocks, with the exception of those in the pharma and IT sector, seem to have broken through their major supports on the downside. A little bit of capitulation like symptoms were visible today with the prices falling drastically with high volumes. However, there were rumours that an American hedge fund was selling and that the retail investors were not capitulating.

Udayan Mukherjee, the senior stocks analyst for CNBC TV18 said today, that the holdings of the retail segment are mostly in the mid cap and small cap segment and only a small quantity of the retail investors would be invested in the large caps. So, if at all a capitulation by the retail investors were to be seen, it would be mostly in the mid cap and small cap segment and very little in the large cap segment. I, somehow, tend to agree with him. I took a look at the chart of the CNX Midcap 200 Index also today and the picture looks grim, to say the least.

Attached above is the chart of the CNX Midcap 200 Index. The Midcap Index fell by 426 points today, or 7.8% to close at 4992. A look at the chart above tells us that the Midcap Index has confirmed a bearish head and shoulders pattern below 5850, which was formed over a period of 12-14 months. The target for this pattern is close to 1700. If this Index does fall to 1700, it would have fallen 82.6% from its all time high. Incidentally, a smaller bearish head and shoulders pattern is visible on the Relative Strength Index (RSI) chart too. A fall of 82% would really be called capitulation. Please do not interpret my words to say that the midcap Index will fall to 1700. What I said was that it has a target of 1700. The market/this index may capitulate much before it reaches that level.

One very important thing to be noticed and kept in mind is the sentiment indicator. All analysts on TV, Radio and the newspapers are now extremely bearish about the markets. More and more analysts have started giving targets below 10000 on the Sensex. The media (both visual and print), besides business newspapers and business news channels, have started reporting about the massive fall in the markets and the amount of money that the investors have lost. Even knowledgeable people like mutual fund managers and FIIs have turned negative and have started selling. There is pessimism all around. All these factors indicate that we are somewhere very close to a bottom. Long term investments could now be made in small quantities (I’m not saying this as a technical analyst but only as a contrarion investor). Maybe this should cheer some of you out there in all this pessimism.

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Below 4000, More Downside Possible

Surprisingly, the markets did not open with a negative bias today and in fact started gaining ground in the beginning of the day. But the good times didn’t last long, in fact, not even a full hour and by 11AM, the markets began their southward journey, and finally found a little bit of support near 4020 at 3PM which held till the closing bell. The break of the support at 4093 (most recent pivot low) was a big negative for the Nifty. The Nifty eventually closed at 4040.55, which happens to be the lowest close since 20th April 2007.

This also means that our Elliott Wave counts of 1,2,3,4,5 of corrective wave C, as mentioned in one of the previous posts has gone wrong. It also means that the fifth wave has not ended as yet. This means that the fifth wave is also an extended wave. We don’t know how long it will be. What we know is that it cannot be longer than the third wave. The third wave started at 5167.40 on May 16, 2008 and ended at 4369.80 (assuming that to be the end of wave 3) on June 10, 2008, thus measuring 797.60 points. The fifth wave started on June 18, 2008 at 4679.75. This means that the wave five cannot go below 3882.15 in any case. If it does then it means that our wave counting is wrong again and that we may still be in wave 3 of major corrective wave C.

For tomorrow we have support between 3970 and 4000, as was seen in the chart shown yesterday. According to the Elliott Wave Counts (assuming them to be correct), we do not expect the final low for the Nifty below 3882.15. So, we may be looking at support between 3882 and 4000. Shown above is the daily chart of Nifty with Elliott Wave Counts and with the Bollinger Bands. The close of the Nifty today was below the lower band, and as mentioned in an earlier post, it means that if the close does not come back within the band tomorrow then we may be looking at more downside. It effectively means that if it breaks 4000 tomorrow then we may be looking at a target near 3882.

The political situation also worsened (or improved??) today. The Prime Minister has decided to go and attend the G8 summit. The Left has taken it as a signal that the Government has decided to go ahead with the nuclear deal and reiterated, once again, that it would withdraw support if it did so. To make matters worse, the Prime Minister said that “there has been nothing new with the Left’s stand”. The political analysts view his confidence as a confirmation that the Government is confident of getting the support of the Samajwadi Party (SP) in case the Left withdraws support. With the UPA tally at 225 and adding 39 as the SP support the UPA still falls 8 short of the magic number of 272 to get a majority. However, getting the support of 8 more may not be too difficult a problem for the government. In case it does get the support, it would mean that the nuclear deal would go through and the government also will not fall. With the Left out of the way, the Government actually may be able to take some positive decisions (not saying that it has too much of time to do that since elections are due in May next year). That would be an ideal situation for the markets to begin a new bull market.

But inflation would still remain a concern and the market may probably be looking at a stabilization in the inflation rates before starting to go up again. With the world commodity prices still increasing and crude on the rise again, and the effect of the petrol price hike last month trickling down to other industries, the inflation figures are likely to become worse at least for another month or two, before stabilizing.

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Nifty Technical Analysis: A Mixed Perspective

The Nifty, as expected, opened deep in the red and a little bit of support was found near 4465, which didn’t last too long, and the Nifty continued to go deeper in the red till it found support at 4412, much lower than the January and March lows. From there a recovery came about but with regular corrections every 50 points or so. Finally, the Nifty ended the day much lower than Friday’s close, but luckily above the three supports we talked about in yesterday’s post.

Seen above is the 30 minutes chart of the Nifty. As can be clearly seen, and as has been marked with the double sided brown arrow, the Nifty opened with a big gap of about 78 points. Even though the markets recovered from the lows, they did not go into the price territory of the gap created. A common principle of gaps is that markets do not like them and they want to fill/close the gaps as soon as possible. The Nifty’s last trade took place at 4516 but after calculating the last 30 minutes average the closing price was derived at 4500. One positive visible is that even though the January and March lows were breached on an intraday basis, they were not breached on a closing basis and this breach is not decisive till it is breached on a closing basis. So, we may see an attempt to fill the gap in a day or two.

I’ve also drawn the Fibonacci retracements for the decline from the top made on 16th May till the bottom made today. In one of my previous posts titled “Another Attempt at Elliott Wave Counts”, I had mentioned that we may be currently in the 3rd down wave of the C wave correction of the bull market. Now, read carefully because there are a lot of assumptions here. Assuming our wave counts of the C wave to be so far correct, we can conclude that the 2nd wave corrected the first wave by 61.8% (not visible in the chart above). And, assuming that we have seen the end of the 3rd wave today, we may expect the 4th wave to correct the 3rd wave by 38.2% or maximum upto 50% but less than 61.8%. This gives us a target of 4700 if it corrects by 38.2% and 4790 if it corrects by 50%, as can be seen in the above chart. But it could also be very well a correction of only 23.6%, in which case 4590 will provide resistance. And assuming that the 5th wave is as large (or as small) as wave 1 then we get a target of 4205 or 4315 depending on where the 4th wave ends. Hopefully, that should be the end of the bear market.

That is not the end of the analysis for today. Above, we have the daily chart of Nifty, along with the same trendline and the Bollinger Bands that we had in yesterday’s post. As seen from the chart above, the Nifty did seem to find support at the brown downward sloping trendline (considering that the close was above the trendline), but it is also evident that the close was outside the lower end of the Bollinger Band and this has bearish implications. This means that further downside is possible, as can be seen in January when the Nifty closed below the lower end of the Bollinger Band. It is also possible that a thing like what happened in March may happen again. The relevant period in March has been marked with a thick brown circle where we saw a close outside the band, then a bullish harami and then a bearish candle again closing outside the band and the markets, surprisingly, reversed from there. We have seen a similar pattern this time around where instead of a bullish harami, we have a piercing pattern and then two bearish candles as compared to one that was seen in March. So, whether we are going to see a January pattern repeat or a March pattern repeat is left to the readers’ discretion. I personally feel, it will be a repeat of the March pattern.

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Nifty All Set to Open With a Big Gap Down

There are days when you are totally lost about what is going to happen in the markets. Today is one of those days. I have no idea whatsoever what is going to happen. I am totally lost. All the indicators are still looking weak and nothing suggests as if there is any strength that we can hope for in the markets. I need ideas from my readers about what they think about the markets right now. Are we going to go further down or are there any supports likely? Please do post your views in the comments section below this post.

Seen above is the daily chart of the Nifty. Also attached on the charts are the Bollinger Bands. It was widely believed that prices move within a band of 2-4% from their moving average, which means that prices tend to go 2-4% above their moving average, then reverse, cross the moving average downwards, go 2-4% below the moving average before reversing again. These bands were modified during bull markets, bear markets and sideways markets. Bollinger Bands work on a similar principle except that there is no need to modify the bands during different market conditions. The calculation involves the calculation of the volatility and standard deviation of the stock/index and based on that volatility the bands either contract or expand from the average. Here is a short tutorial on Bollinger Bands.

The only way to make profits in the markets is to buy low and sell high, or buy high and sell higher or sell low and buy lower. But what is low and what is high? The Nifty is near 4500 today. Is that high or is that low? If we say it is low since it is near its lows, how do we know that it will not go lower to 2600? And if it is high, how do we know that it will find support near 4500? Bollinger Bands give you no clear buy or sell signals. But they are very good at giving you ideas about what is going to happen and whether we are near the highs or the lows. Whenever in doubt, I use Bollinger Bands. When the prices are near the top of the band, we know that it is time to come down with support at the moving average and second support at the lower end of the band. Similarly, when prices are near the lower end, it may be time to reverse and go up to the moving average to find resistance there or continue to the top end of the bands. Of course, the situation changes when prices close outside the band, in which case it becomes a continuation of trend rather than a reversal.

Things are not clear even from the Bollinger Bands this time. We had three continuous closes outside the lower band in the last five days before a blue candle came and closed within the bands indicating a reversal. Things are fine upto here. This is where it starts getting messy. After this blue candle, the Indian inflation figures are declared with it increasing to 8.24% (no surprises there) and we get a red candle. The same evening crude jumps up $10 a barrel in one single day, the Dow Jones crashes by 400 points in a day and, obviously, the Asian markets will open lower on Monday. With all these global cues, our markets will definitely open with a big gap down. Now whether they will sustain those levels or come back up is another question. If they do sustain those levels and we get another close below the lower end of the band, we are in for trouble – BIG TROUBLE.

But, in case they reverse (my guess is, they should, but I could be wrong too), things may start looking a little rosy for sometime. Prices will reverse, there will be some short covering, prices shall go to the moving average between 4850 and 4900 and find resistance there and then come back again to complete the 5th wave of the C wave of this bear market, as was explained in one of my earlier posts.

Well, there are some positives available, though the negatives heavily outnumber the positives. The Bollinger Bands create enough confusion because of which I have not added too many trendlines. In fact, I have added just one small thin dashed brown trendline (marked by the green arrow in case you miss it in all this confusion). This is providing support to the prices near 4463, we have support of the March lows at 4468 and January lows at 4448. With three supports close together, there is quite a possibility of a small reversal from here. But it all depends on how it pans out tomorrow. Dow Jones, on Friday, was down 3.13% from Thursday’s close. If our markets open with a 3.5% gap down, they should open at 4466, still above the supports. So, maybe, just maybe, there are some hopes alive.

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