Nifty Going Down, Maintain Shorts

Today the Nifty opened on a stronger note but soon started falling and within minutes it was in the red and from thereon, it was a unidirectional fall for the Nifty, except in the last hour and a half when it made a strong recovery, but not enough to bring it in the green. In the process, just after opening it made a high of 5996, in the mid-afternoon it touched a low of 5917, recovered to 5951 and then ended the day 46 points in the red at 5939. Well, the Nifty made it clear today that it is going down and going down a long way. But the small recovery towards the end could be a signal that a small bounceback could come.

Nifty Entering Resistance Zone - Buy Puts

In the last four days the Nifty has shown an amazing bounce-back from a low of 5500 to a high of 5794.35, a movement of almost 300 points. That is an excellent bounce-back, especially when we were expecting the Nifty to go lower to 5200 levels. Well, we are still looking at those targets, this is just a temporary pullback that we are seeing. The pullback was expected, especially on seeing the support the Nifty was finding near the 5500 levels. Negative news including the Infosys results failed to take the index below the 5500 levels. I had warned about the pullback on this site too when I said that it is time to be careful. This warning was given earlier but since it did not come about that time, it came now.

Commodities Now Looking Good

The Nifty after touching a high of 5777, just short of the previous high of 5815, has turned down again and closed 55 points in the red and has come back into the range of 5630-5730 that it was moving within. As of now, there is nothing to suggest that the Nifty has finished its uptrend and therefore we shall wait for some more time before taking short positions again. However, there is one thing that is causing concern. On 1st Nov, the Nofty made a high of 5649, while the next day the low was 5682, a gap of 33 points which was still unfilled. The lowest low the Nifty had made since then was 5679. Today, it made a low of 5677 and thus has come back into the 'uncharted territory'. This suggests that the gap may now be filled. While it should find support near 5650, but a move below that would be bearish.

Still Rangebound, A Range Breakout to Decide Direction

It was again a narrow range day for the Nifty. A total intraday movement of 56 points (1%) but a better day, nevertheless, because it traded with a negative bias all through the day before recovering some of its losses in the last hour. I say, a better day because it went in the direction which we expected. And as long as it fulfills our expectations, it keeps us happy. And that's all that we desire from it. Just keep giving us profits if you want love from us. I still don't understand why the Nifty is still holding up. What is it waiting for - a cabinet reshuffle or the RBI monetary policy. Well, if it's one of those things then a move - this way or that - is coming soon. A move above 5725 would change (probably, though I don't like to change my views often) our bearishness.

I'm not attaching the chart of Nifty today as there is nothing new to show. However, as always am doing the daily analysis of some of the stocks. Friday seemed to be at bad day for the banking stocks. I say that because on my stock radar (the stocks that I regularly monitor), there were 13 stocks which closed 3% or more below their previous closes and out of those 13 stocks, 6 were banking stocks. Surprisingly, amongst all this negativity surrounding banking stocks, our buy call on OBC yesterday fell only by Rs.4/- and is still looking good for a move to 350.

Attached above is the daily chart of Reliance Capital, which has already come down quite a bit off its previous high. But, as we can see from the chart, Reliance Capital rose from a low of 315.10 in end of August to a high of 472.90 in early October, going up by 50%. Going up by 50% in 6 weeks is a big move and a big move is always (invariably) followed by a big correction. The same scenario was seen in Jan-Feb 2012 when the same stock went up 114% and then underwent a correction of 78.6%. This time too, after a move of 50%, I feel a correction of at least 61.8%, a Fibonacci ratio, is called for. The 61.8% correction will be completed at 375. That means a downward movement of Rs.42 (10%) from the current level of 417. Whether to stay away or to stay short - your call.

Attached above is the daily chart of Karnataka Bank. As seen from the chart, an inverted hammer formation on the top followed by a red candle signifies that the uptrend may have come to an end. And what an uptrend it was - a rise from 78 to 138 in six weeks, another big increase of 78%. And as I said before, a big move is followed by a big correction. In this case a 61.8% decline would mean the stock could come down to 101 whereas a 78.6% correction would translate into a level of 91. I see some good support for Karnataka Bank between 100-102 adding to the fact that 100 is a psychological support too and would expect the stock to come to 101, at least.

Andhra Bank's daily chart is seen above. An 8 month old trendline tested 4 times in the past was broken through but could not be sustained and today it came back below the trendline. In the process Andhra Bank has also made a pattern, which could be referred to as a double top, was also formed but would be confirmed below 105. A target for this double top formation would be close to 95 and I expect support to come in between the 93-95 levels.

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A Correction on the Cards

The Nifty closed a quarter of a percent down today losing about 14 points from its previous value. After a reasonably decent opening at 5673, it continued to move up in the morning trades to make a high of 5693 before noon. It remained in the positive till about 2 in the afternoon when the bears took over and pushed it into the negative territory. A last ditch effort to remain in the positive came in the late afternoon trades but could not sustain and the Nifty closed at 5649.50, 14 points in the red.

Attached above is the daily chart of Nifty. Shown on the chart is a trendline sloping upwards connecting the early June, late July and early September lows. Also shown on the chart are two indicators, the MACD and the RSI. Another line is shown connecting the last two most recent highs and a corresponding highs made by the RSI in the same period. As can be seen from the charts, the Nifty made a higher high while the RSI failed to do so in the corresponding period, thus showing a bearish divergence. The RSI has turned downwards and has just penetrated its 9-period signal line, indicating a sell, albeit mild. In the last 20 days, the Nifty has gained almost 500 points without any major correction, a gain of almost 10%. At this stage, a correction is long overdue and signs of weakness are already visible on the charts. A downward correction may take the Nifty back to the upward sloping trendline which could provide support to the Nifty close to the 5400 levels. A steeper downward move could take the Nifty down to the dashed blue line which lies at 5360. This is the line which has provided support to the Nifty once and resistance to it 6 times in the last 9-10 months, a very significant support indeed. So, till we get to that point, it's just a sell on rise market and when we get to 5400 nearabouts it's going to be converted into a buy on dips market.

Seen above is the daily chart of Silver. Silver in the last 45 days itself has shown a rise of almost 12000 points, a rise of almost over 20%. By the looks of it, and using the Elliott Wave Principle, I think we have just entered wave 4 of this uptrend. And if this is a wave 4 then I would expect that the correction would not be very deep (maximum 38%). Secondly, according to the rules, wave 4 should not enter the price territory of wave 1 and the highest point of wave 1 was 56337 and we are a long way from there. A 38.2% retracement, as shown can bring Silver down to 60142. The 23.6% retracement level lies at 62255 and the last 3-4 days, even though have shown a spike below that level but never has Silver closed below it in this correction. This suggests that this 62255 may be a tough level to break. The two consecutive green candles in the last two days show that the price is ready to move up again. An upmove from this point may see Silver finding resistance near 64000 levels and if it crosses that, it can go right past the previous high of 65670 too and my next target for Silver then would be around 68000. But it all depends upon whether the wave 4 correction is complete yet or not. And believe me friends, only time and the markets can tell that, not mortals like you and me. All in all, by the evidence that we've got till now, I would be a seller in Nifty and a buyer in Silver. 

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3800 Support on the Nifty May Not Hold

The Nifty on Friday closed at 3985 after giving bearish signals (breaking of the 4000 support). The next support was there at 3800, 185 points away from the previous close. On Sunday night, I chose to upload a webinar for my readers rather than do any analysis on the Nifty, mainly because I had been talking of a target of 3800 since a number of days and secondly, I didn’t feel Nifty could lose 185 points in one single day. And yet, it did. After losing 208 points intraday (from Friday’s close), the Nifty bounced back a little to close at 3850 with a loss of 135 points. The markets were expected to be better after the Federal Reserve’s bailout bill, which plans to induct $700 billion into the global financial system, went to the Congress for voting. But after reports that Wachovia and three other European banks were banking on the Fed rescue, the markets slumped fearing that the $700 billion bailout package may not be enough to ride over the current financial crisis.

Today, the Nifty made a low of 3777, breaking the previous 52 week low of 3790.20 made on 16th July 2008. After making a low at 3777, the Nifty immediately made a recovery, and a good one at that, to end the day at 3850. Today’s closing price became the second lowest close in the last 52 weeks, the lowest being 3816, again on 16th July 2008. Making a new 52 week low is negative for the markets, and even though the market recovered to close above 3800 today, it seems quite possible that 3800 may be broken on the downside.

Seen above is the monthly chart of the Nifty. The chart shows the Fibonacci retracement levels of the rise from the much remembered low of 920 in April 2003 to the much much remembered high of 6357 made in January this year. The 38.2% retracement level support was at 4300 which was broken through, a few months ago. Since 3800 now seems to be under danger, it is important to know what the next support levels are. What provides support now is the 50% retracement level which is at 3640. Just below the 50% retracement level, is a black trendline which may act as another support if the 50% retracement level is breached. This trendline connects a few closes, a few opens and a low in the candles formed in the last couple of years. This trendline stands at 3558 and below this there is the 61.8% Fibonacci retracement level at 3000, which provides support and then the final support comes at 2600.

Of course, supports are just supports and are important only to identify where the market may stop its downmove. But the markets have a mind of their own and can decide to stop the downmove anywhere, no matter whether a support is there or not. Knowing a support level in advance helps us a bit because if the markets do decide to find support near a support level identified by us, we are better prepared to convert our ideas into an actionable long trade. I have mentioned above that it does not seem likely that the 3800 support will hold. Though, the markets suggest otherwise, I would be happy, and I’m sure a lot of other people will be happy too, if the markets prove us wrong this time and keep respecting the 3800 support.

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Nifty Falls, Ignores Island Reversal Pattern

The Nifty opened weak today, as was expected, because of the weak American and Asian markets. The Dow Jones was down 372 points overnight while all Asian markets, except Nikkei, were trading in the red with Hang Seng leading the pack, which finally closed with a loss of 759 points, down 3.87%. Followed by a weak opening, the Nifty did try to recover but the happiness lasting only about an hour or so, after which the index started its decline. Another attempt at recovery came shortly after noon but that too didn’t last long and from there it was a steady decline for the Nifty through the day. The island reversal pattern seen on the Nifty two days back was completely ignored today.

Seen above is the tick by tick chart of the Nifty. As seen from the chart, the Nifty, early in the morning, after going to 4150 started going up, made a top near 4190, and came down to 4171.35. Then a small recovery took it past its highs of the day, went up to 4224.60 came down to 4171.35 again, climbed to 4203.30 and finally broke through 4171.35, thus completing a bearish head and shoulders pattern. With the top of the head at 4224.60 and the neckline at 4171.35, the target was 53.25 points (4224.60-4171.35) below 4171.35. This gave us a target level of 4118.10 (4171.35-53.25) on the Nifty. So, we saw a bearish head and shoulders pattern being formed, being confirmed and the target achieved, all in one day. And we can see that after this head and shoulders pattern target was achieved, there was an immediate bounce in the price from that level. This case was more like a case of a perfect head and shoulders pattern. In most cases, either the neckline is not straight, or the shoulders are not perfect or the target is not achieved or the price overshoots the target. But then, life is never perfect. One has to live it the way it is offered to us and make the best of it.

Well, that was the intra day chart for today only, but what is the forecast for tomorrow or the days after that? To try and forecast what the market would do is like trying and forecasting whether the next toss of a coin would be a heads or a tail. The market remains as unpredictable as ever and most of the times move against our wishes/forecast. But we also know that when it does move in our favour, most of the times we get a move big enough to wipe off most of our losses. That is where technical analysis comes in handy, where 7 trades out of 10 turn out to be loss making trades, but the remaining three trades are big enough to wipe the 7 losses and giving us a net profit. Technical Analysis only helps us increase the probability of making a profit. One of my previous posts title “The Probability of Profitability” very well explains this. Well, and to do that we have to analyse to see what our analysis says.

Attached above is the 30 minutes chart of the Nifty, which gives us a slightly longer term view than what the intra day chart gives us. Notice that in this chart, the bearish head and shoulders pattern, which was so clear in the tick by tick chart, is not visible here. Last week we had seen the Nifty slip into a narrow range between 3950 and 4100. This range has been marked by a trend channel/rectangle. Notice that the upper end of the rectangle lies somewhere between 4090 and 4100 and not exactly 4100. Also shown in this chart is the Moving Averages Convergence Divergence (MACD) and the upper line of the rectangle extended till date. This extended line tells us that there is support available between 4090 and 4100. The MACD, which had given a sell signal yesterday, reaffirmed it today by going below the equilibrium line at 0. Notice that there is a blue coloured trendline here too which shows that there maybe support available for the MACD at current levels, which, if broken, would have bearish implications. There are also Fibonacci retracement levels drawn on the chart for the two day rise from 3800 to 4300. These Fibonacci levels tell us that the 38.2% level is still intact may (or may not) provide support at 4112. If this is breached, the next Fibonacci levels of support are at 4050 and 3995, being the 50% and the 61.8% retracement levels, respectively. For now, we can just wait and watch, which of these levels does the Nifty feel worthy enough to respect.

As far as the international markets are concerned, the London FTSE and French CAC closed with a loss of about 2% while the German DAX lost 1% of its value. American markets are more or less flat at the moment while the crude has come off its yesterday's highs and was today in the vicinity of $106 a barrel.

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Outlook Good for the Nifty After Island Reversal

After a fascinating run up in the Nifty in the last two days, it sure had some breath catching to do. Markets are half human, which means that if we get exhausted after a brisk run, so do the markets. And the run up seen in the last two days was much more than what we can call a ‘brisk run’. So, obviously, the markets needed some rest and they got it today. The Nifty managed to go about 50 points up in the first 30 minutes of the day and made a high of 4303 (as compared to my analysis yesterday that it had resistance at 4300). Soon enough, it started coming down and finally ended the day with a loss of 22 points while the BSE Sensex closed 47 points down. As of now, European markets closed in the red with prices paring upto 1.5% while the Dow Jones is more than 2% down. Crude has shot up to almost $128, a jump of $25 in a day. So, all international cues, at the time of writing this post, are negative.

Seen above is the 30 minutes chart of the Nifty. We shall discuss island reversal techniques here. The Nifty on Monday last (15th Sep 2008) opened with a huge negative gap when Delhi was rocked by serial bomb blasts on Saturday, 13th Sep 2008, and Lehman Brothers in the USA declared bankruptcy. Three days later, on 18th Sep 2008, the markets opened with another big downward gap but soon recovered and the very next day it opened with a big positive gap after the US government bailed out insurance giant AIG by granting them a loan of $85 billion in return for 80% stake in the company. These gaps created a pattern known as an island reversal pattern. In such a pattern the prices open with a downward/upward gap, trade in a narrow range for sometime, and then open with another gap on the opposite side thus creating a candle or a cluster of candles to be separated from the rest of the candles. A cluster at the bottom is a bullish sign while a cluster on the top is a bearish sign. It is usually said that in case of an island reversal, chances are reasonably high that prices would return to the point from where the previous trend started. In this case the last downtrend started from 4540, so the charts suggest a rally to that level. More on island reversals can be read on Bedford and Associates and Incredible Charts. There are lot of other sites with information on island reversals. The chart above has today’s price candles inside a square which has been zoomed into and that shows another candle today which is separated from the rest of the prices, another short term bullish sign. Needless to say that an island cluster holds more significance and is more reliable than a single candle formed as an island.

Seen above is the same 30 minutes chart of Nifty but with another set of information. We are trying to use some Fibonacci rules on this chart. The prices started coming down from a high of 4538 on 8th Sep 2008 and touched a low of 3800 on 18th Sep 2008. Then the trend reversed and the prices rallied and retraced almost 61.8% in a matter of two days as shown by the Fibonacci retracement levels in dark green and in large brown numbers. A small rest is being taken by the Nifty currently. There are two possibilities. If we are in a bear market, we could see all these gains wiped out and should see prices coming below 3800. But if we are in a bull market then the most reasonable ‘rest’ that we can expect is a retracement of 23.6% or 38.2% of the rise seen in the last two days. As seen by the Fibonacci retracement levels in light green, a 23.6% retracement should see prices down to 4190 levels while a 38.2% retracement would bring us down to 4115. As already mentioned, international cues are all negative at the moment.

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Nifty Turns From Fibonacci Support

The Nifty recovered today, as we had been expecting in the last two days. The signals were quite evident as there were multiple supports available between 4330 and 4380, as was mentioned in the post titled “Multiple Supports for Nifty Between 4330 and 4380”. While writing the newsletter last night, the global situation was bad but the Asian markets were good in the morning. The American markets today are flat while the European markets closed marginally in the green.

Pasted above is the daily chart of Nifty zoomed in to see the most recent data along with the Fibonacci retracement levels. The rally that started in the middle of last month and which continued till the middle of this month and which measured almost 800 points has retraced by 38.2% and exactly from those levels it turned back. Fibonacci retracement levels are very helpful to determine support and resistance levels for the markets.

Not shown on the chart, but which was part of my analysis today, was the retracement levels of the recent decline from 4650 to 4316 and I found that during the current rally the market would retrace 38.2% at 4450, 50% at 4485 and 61.8% at 4520. So, these are some of the resistance points for the markets. 4450, as can be seen on the chart above, also happens to be the 23.6% retracement level which again should provide resistance. That does not mean that it will find resistance and turn back at one of these levels, but it remains a possibility.

Mr. Sudarshan Sukhani, a noted Technical Analyst, in his blog post today mentions that the Nuclear Suppliers Group, which is to meet on Thursday, is likely to approve the India specific nuclear safeguards agreement. He feels that the current rally may be discounting that news in advance and he is expecting a euphoric surge once the news does come through. He advises his readers to book profits during that euphoria as the positive effects out of the deal will be seen 10 years from now and that it is just not worth an increase in the markets now. I somehow agree with his view. In any case, I expect the markets to remain range bound and the possibility of the markets crossing 4650 in this rally remain bleak. If the Nifty does manage to go above 4650 in this rally, I would be proved wrong by the markets one more time.

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Crude Oil: Where Will It Stop?

Another weekend. Another day of confusion for me to think of what to write about. That is because markets are closed on weekends and I do not do analysis of Friday’s markets till Sunday night. So, Friday/Saturday posts I have to write about general interest to me and all my readers. Of course, I could write about cricket but that is my interest and I’m not too sure whether it is also the interest of my readers and subscribers too. And, moreover, there is nothing to write about cricket on a day when India lost to Sri Lanka by an innings and 239 runs within four days. Hats off to Muttiah Muralitharan who ended with 11 wickets in the match! No wonder he has the highest number of wickets in Test matches. And I do believe him when he says that he will end up with 1000 Test wickets in his career. Anyways, since cricket is not on my blogging list, let us shift to the next most important thing – crude.

In an earlier post, I had written that there were signs visible that crude was showing signs of topping out. And in fact, that day turned out to be very close to the final high made in crude. We all know that crude finally broke down a few days later and is now more than $20 off its highs. People are talking of support near $120, some say $110 and some even say $80. I do not have access to charts of crude traded on NYMEX (New York Mercantile Exchange). Hence, I do the analysis based on the charts formed by prices on MCX (Multi Commodity Exchange). Since MCX is an Indian exchange prices are quoted in Rupees.

Seen above is the daily chart of crude since the beginning of 2008 along with a trendline, a couple of Fibonacci Retracement analysis and the Relative Strength Index (RSI). Let us start with things in chronological order. My previous post on crude talked about the presence of various dojis (a day on which the opening price and the closing price is the same or is very close to each other), which made the charts look a little bearish, even though the prices were increasing every day. Also seen on the charts is a bearish divergence between the prices and the RSI where the prices are increasing while the RSI is falling (as marked by the thick trendlines and the brown arrows). Next, let us come to the trendline. The prices finally broke through the trendline three days after that analysis but soon recovered. The trendline was decisively broken about a week later when the crude prices even went below the most recent pivot low. Not only that, yesterday it has decisively broken through the pivot low formed in end of May. What remains to be seen is whether this can be qualified as an intermediate term downtrend or not. Technically, the breakthrough the most recent pivot low and an uptrend line gives quite a bright possibility that the trend may have reversed. However, it is not confirmed till we have a pattern of lower highs and lower lows visible. While lower lows are seen on the chart, a lower high has not been formed as yet. So, we would have to wait for a pullback and see whether the previous highs are broken through or a lower high will be made. Another post on my blog, which did the Elliott Waves Analysis of crude may suggest that an intermediate term high may have already been made.

Let us now see where support is likely. For this purpose I have used Fibonacci retracements. I have used two retracements starting from the lows marked at A and B till the high marked at C. As seen from the chart and the price action in the last two days, support is being found near the 38.2% Fibonacci retracement level of AC and near the 50% retracement level of BC. One possibility is that the prices may find support at these levels and may reverse, which could happen to be a short term (or who knows, a long term) reversal. If the prices do break through these levels, support may be found near 4865 where two Fibonacci retracements of 50% (of AC) and 61.8% (of BC) converge. Support may even be found there. Of course, it may decide to continue going further down. Where it eventually finds support can only be decided by the crude itself and no amount of analysis can say with certainty where the ultimate support would be found.

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Will the Prime Minister Resign Today?

Yesterday the RBI increased the CRR to 8.75% up 50 basis points and increased the repo rate also by 50 basis points to bring it to 8.5% as against the 8% that it was at currently. This was largely expected by the market, but a small and immediate reaction was to be expected, as our column had predicted yesterday. And that is what happened at the opening bell. The Nifty opened a 100 points down and immediately started recovering from there. It recovered for a couple of hours before it went into a small 30 points range for over 3 hours. Finally, it showed a brief and small spurt in prices in the last 30 minutes.

The UPA-Left meet was expected today on the nuclear deal issue and since that did not happen till the market closed, there was no reaction. It is surprising that the government has yet again managed to buy more time. This time the members of the meeting decided to meet again to ‘finalise the findings’ on the deal. While it was announced that the meeting would take place ‘in due course’, it is not expected to take place before a couple of weeks. Meanwhile, there were rumours (as reported by a news channel) that the Prime Minister, Dr. Manmohan Singh, may tender his resignation before the G8 summit which is to start on July 8, 2008. There is a report of a cabinet meeting being held at 11AM tomorrow. I wonder if Dr. Manmohan Singh will submit his resignation to the cabinet then.

Seen above is the same 60 minutes chart of the Nifty that was shown yesterday, except that it has been updated with today’s data. As expected and discussed in yesterday’s post, the Nifty bounced back from its wave 5 target levels after a positive divergence was seen between the Nifty and its Relative Strength Index (RSI). If this was the end of the wave 5 of the corrective wave C, it would mean that the bear trend has ended today. Is it so? Well, that is very difficult to say right now. That is the problem with the end of trends. It is not possible to say that the trend has changed unless a confirmation comes through. Unfortunately, a confirmation of the intermediate trend changing will come only if the Nifty were to cross 4680, while a warning that a trend change might occur will come if the Nifty were to cross 4530. This level may change with time. Elliott Wave specialists can say with certainty whether the trend has ended or not even before the confirmation comes. But I hear no analysts shouting from the rooftops as yet that this is the end. I, myself, am no specialist of Elliott Waves but my analysis says (considering that our wave counts are correct) this may have been the final low made by the Nifty in this downtrend. However, if Dr. Manmohan Singh does resign tomorrow, we shall have another deep knee jerk reaction which will lead to capitulation and then a final low being made. It is difficult to say whether a final low would be made now (in a day or two) or shall we have to wait till the last week of August as our analysis on Fibonacci techniques suggested in an earlier post.

The Nifty opened about 100 points down today but I wouldn’t go as far as to say that it was capitulation, mainly because there was no selling climax. In the absence of a capitulation and a selling climax, it will be very difficult (and risky) to say that a final low has been made. What options are we left with? A short term uptrend shall be signified above 4328 while an intermediate term uptrend, as already mentioned, shall be confirmed above 4680. I’m afraid, at the moment we do not have too many options but to wait and let the market tell us what it wants to do. I would be much more confident about predicting the markets after the government falls. Let us see if that does happen.

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Fibonacci Time Zones on Nifty

I’ve written a number of posts about the Fibonacci Series and the importance of Fibonacci numbers in the stock markets including a webinar on the Fibonacci sequence. A few of such posts have been listed near the end of this post.

The Fibonacci Series was given by an Italian Mathematician by the name of Leonardo of Pisa (1170-1250AD), who was also known as Leonardo Pisano, Leonardo Bonacci, Leonardo Fibonacci or simply Fibonacci. A very interesting story is attached to why he was called Fibonacci. Leonardo’s father Guglielmo was nicknamed Bonaccio (meaning ‘good-natured’ or ‘simple’) by his friends and Leonardo was called filius bonacci (which means son of Bonaccio) which was later nicknamed Fibonacci.

The Fibonacci Series is a series of numbers which starts from 0 and 1 and each of the succeeding numbers in the series is derived by adding the previous two numbers in the series. So it goes as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 and so on. Each number is 1.618 times its previous number, 2.618 times the number before that and 4.236 times the number before that. Similarly, each number is 0.618 times its next number, 0.382 times the number after that and 0.236 times the number after that.

Fibonacci is present everywhere in nature and this video very well describes it. Needless to say, even the stock markets rely heavily on it. Elliott Wave Principle says that markets move in a direction in a series of 8 waves out of which 5 waves are in the direction of the trend and 3 move counter to the trend. Interestingly, all three numbers 3, 5 and 8 are Fibonacci numbers. It is a known principle that when markets retrace a particular move, they generally find support/resistance at Fibonacci ratios which is why the ratios 23.6%, 38.2%, 61.8%, 161.8%, 261.8% and 423.6% hold a lot of importance. A lot of material can be found on various Fibonacci techniques used in the stock markets such as the Fibonacci retracements, Fibonacci Arcs, Fibonacci Fan Lines etc. However, I am concentrating today’s discussion on the Fibonacci Time Zones. According to the Investopedia, the Fibonacci numbers play an important role in determining relative areas where the prices of financial assets experience large price moves or change direction. There are various examples which show that markets show a high range candle or change direction on the 3rd day, 5th day, 8th day, 13th day, 21st day, 34th day, 55th day and so on. Today’s discussion, however, won’t delve into high range candles but will only concentrate on change of direction.

Before I go deeper into the subject, I would very quickly like to emphasize how the Fibonacci numbers affect the markets naturally. A week consists of 5 trading days (a Fibonacci number), a month consists of 21 or 22 trading days (21, again being a Fibonacci number) and a year consists of 245-250 trading days (being very close to the 233 Fibonacci number). Interestingly, a year has 52 weeks (very close to the 55 Fibonacci number) and 8 weeks consist of 56 days (close to the 55 Fibonacci) and 8 months consist of 240 days which again is quite close to the 233 Fibonacci mark. So, Fibonacci occurs naturally. Nobody had any real intention of making the markets respond to Fibonacci numbers but they naturally do.

I have the weekly chart of the Nifty above, and on it I have drawn vertical lines where a significant market top or a market bottom was formed. Then I have calculated the distance between the top and the next or the previous bottoms and written the number of weeks taken to reach the next low/high. As can be seen from the numbers the market has been consistently making use of Fibonacci numbers like 3, 5, 8, 21 (on some occasions it has deviated to 20 or 22 also) and 34 (though, on one occasion it took 35 weeks) to turn around right from the low formed in May 2003 till Jan 2008. Another interesting thing to note is that the bull market that started in May 2003 and ended in Jan 2008 has taken a total of 55 months, 55 again being a Fibonacci number. Interestingly, the turnaround that happened in Jan 2008 and which has been continuing till now has now completed 24 weeks and is now in the 6th month which has decisively crossed the 21 number mark and the Fibonacci number 5. It means that the markets may not turn around till 34 weeks or 8 months are completed or if things do turn out to be very bad then maybe 55 weeks or 13 months. But we should be looking at the last week of August very carefully as a possible turnaround time because that is when the markets would have completed 34 weeks of a downtrend.

But what about the downside? How low can go the markets go? Let us make use of the Fibonacci retracements this time. The Nifty made significant lows of 599.51 in March 1993, 800 in Nov 1998 and 920 in April 2003 and a significant high of 6357.10 in January 2008 (I can’t help noticing that these are spaced more or less 5 years apart, 5 again being a Fibonacci number). Calculating the 38.2% retracement levels from these different lows to the same high of 6357, we get the support levels of 4280, 4234 and 4157. These are some of the levels where the markets should eventually find support.

I heard an analyst speaking on TV a few days back who was saying that after a long bull market a correction in price as well as time is required. He was saying that we may have seen two thirds or more of the price wise correction but have seen only a third of the pain. He said that in the weeks to come, the price may not fall too much but a lot of pain will be there, which is imminent if the markets were near the support and the bulls and the bears continue to fight near a particular level trying to decide what an appropriate bottom for the market is. Even after the bottom is formed, the pain will not be over since, then the market could go into a long period of consolidation and base building before a significant recovery in price is seen. If this were to be true, we may see a bottom being formed in the last week of August 2008 but a significant price increase (maybe a breakthrough above 4700 or maybe 5000) may not be seen for the rest of the year.

We have tried and have made an effort to analyse what the market may do but, ultimately, the markets have a mind of their own and can prove us wrong anytime. We have to be quick and humble enough to accept our mistakes and change our stance if the markets were to prove us wrong. On the other hand, if the market does move according to our wishes then we know the price levels and the approximate time where we can be more careful and decide whether the market has a mind of proving us right or not. As I said, technical analysis is all about the probability of profitability.

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Repo Rate Hiked, No Major Reaction Expected

The Nifty opened in the positive today and then had a few volatile sessions where the market was taken up, brought down, taken up again, brought down again and stayed in a range of 4490-4540 throughout the day. It finally closed the day at 4523, 73 points in the green.

Before I delve further into the newsletter, I must apologise for posting just the charts yesterday without much analysis and commentary. Actually, it was pretty late when I started last night and was already feeling sleepy when I started.

Today, I have the 30 minutes chart of the Nifty for you. A little bit of on-the-chart-analysis yesterday told you that there was some positive divergence visible between the price and the Relative Strength Index (RSI). A positive divergence, or a bullish divergence, occurs when the price is making a lower low or a lower high and an oscillator indicator (like RSI, MACD, Momentum, Rate of Change etc.) makes higher lows or higher highs during the same period. This positive divergence has been marked by the thick brown lines in the chart.

Another area on the chart marked by a brown double sided arrow is the gap created three days ago which still remains unfilled. One of the characteristics of a gap is that they are either filled very quickly or remain unfilled for a long time. This gap should have been filled by now. The reluctance of the price today to go into the gap territory is clearly visible on the chart. This may not be a very good sign for the markets. A double resistance is close by at 4560 which is the 23.6% Fibonacci retracement level and the green coloured downward sloping trendline.

In case the Nifty were to cross this resistance, it should go on to fill the gap and reach the 38.2% retracement level at 4675 or find resistance somewhere within the zone of resistance marked by the black rectangle between 4670 and 4720. The RBI has increased the repo rate by 25 basis points from 7.75% to 8%. A major part of the market was expecting some sort of intervention, following the petrol and diesel hike, by the RBI before their next credit policy which is due in July end. Since a major part of the market was expecting a hike, it may have an immediate knee jerk negative reaction on the markets but no major downside owing to the rate hike is expected. Of course, a major downside based on technical factors (like the gap not being filled or the previous low of 4370 being broken) cannot be ruled out. The best thing would be still to maintain a cautious view.

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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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Another Day in the Red, Technical Bounce Back May Come

It was another red day for the Nifty and the last three candles have been pretty large which suggests that the prices are coming down without finding any support inbetween. The trendline that was in place since the low formed on 18th Mar 2008 was easily broken through yesterday. Till a support is found at some level, it may continue to fall at the current rate of 70-80 points in a day.

Seen above is the daily chart of Nifty. Besides the upward sloping trendline, also seen are the Fibonacci Retracements of the rise from 18th Mar 2008 to 2nd May 2008. We have seen that the 23.6% and 38.2% retracement levels were crossed without any hassles and the same seems to be the case of the 50% retracement, though, that still needs to be crossed decisively. The next support comes in at the 61.8% retracement level near 4785. Let’s hope that support is found there or else there may be further downside involved.

In this post I had mentioned that I am trying to develop a trading call system which gives me small profits but gives me profits 85-90% of the times. Let us name it as ‘System A’, for convenience sake. This system had given me a long entry for Nifty Futures at 4998 with an exit at 5100 and a short entry at 5036. Thus, I made a profit of 102 points on the long position and am gaining 150 points on the short position. Before that I was given a short signal in the beginning of the month at 5178 which was eventually covered at 5010, a profit of 168 points, which means a total profit of 420 points in a month which is not yet over. A profit of 420 points on even one lot of Nifty works out to a profit of Rs.21000/- by paying a margin of only Rs.35000/- which means more than a 60% return on investment in less than a month. Of course, this has been a good month for ‘System A’ and future months may or may not better the current performance.

By going below the previos low of 4913, it has been confirmed that Nifty is now in an intermediate term downtrend according to the Dow Theory because a lower high and lower low are already in place. The target, as mentioned in the previous edition, could be as low as 4500 but there are supports available at 4800, 4630 and 4470. While the Nifty remains in a downtrend we can just wait and watch where the decline will end. No buying is recommended for now. After five days of lower lows and lower highs, there may be a small bounce back which could go upto 5020. This should not be mistaken for an end of the downtrend but should instead be used to exit from long positions or to go short. There is more downside possible.

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Nifty Breaks Important Support

Before I start this edition, I must apologize for not being able to post my views on this blog on Thursday night for Friday due to some personal problems. Rest assured, I’ll try to be as regular as I’ve been in the past. I’ll continue with my plan to post a newsletter for every market day and an extra on a weekend. The Nifty, on Friday, did open slightly in the green but soon started losing ground. It managed to hold on to the support between 5000 and 5050 for a couple of hours but soon after noon it started slipping quite heavily and from there it was a unidirectional decline for the Nifty.

The chart of the Nifty has suddenly changed in the last two days. If we ignore the last two candles in the chart, we can see that we were pushing against the resistance line and the blue candle had a long lower shadow which showed that the price did go down but buying came in at lower levels and that actually took the price past the day before’s close. Suddenly, that day was followed by two red candles which changed the chart completely. Now we have broken through the support line near 5000, as signified by the solid green line, which is highly negative. A lower high is now already in place and below 4913 we will have a lower low too, thus signifying the start of a new downtrend according to the Dow Theory. According to the trendline theory, we have now entered an intermediate term downtrend. The target for this downtrend may be somewhere between 4500 and 4550. However, support also comes in at previous lows of 4913, 4630 and 4470. There is a reasonable good support at current levels near 4950. It is important that the previous low of 4913 is not broken if we are want some stability in the markets.

A lot of the current fall in the markets has been attributed to inflation which has been on the rise due to the jump in prices of crude oil. Crude Oil has almost doubled in the last 10 months and the jump has been exponential in the last two months. What actually has been happening in crude oil? Is it likely to come down? Well, some people say it is likely to come down now and there are others who say a price of $150 per barrel is likely in the next few days. Who do we believe? The best thing, I would believe, is to look at its chart and decide for ourselves.

Given above is the daily chart of crude oil futures as traded on the Multi Commodity Exchange (MCX). The price is in Rupees but the chart, whether in Rupees or in Dollars will remain the same. As seen in the chart, the thick red line is the line chart (close) of crude oil and we can see that it has now found some resistance near 5650 near the blue line. We can see that the support trendline is too far down near 4800 (which will reach 4900-5000 by the time the price comes down). A fall to 5000, though, may not be possible but a fall to 5100-5150 is likely. 5150 also happens to be the 23.6% Fibonacci retracement level of the rise seen from the February lows. That would correspond to roughly $120 per barrel. Also embedded on the chart in the gray line is the chart of Gold futures on MCX (the scale for Gold has not been shown). As seen by the chart, the price of both Gold and Crude is moving in tandem and a fall in crude could also make the yellow metal cheaper.

Buying should be avoided for now since the short term trend is now down and it is likely that the intermediate trend may also turn to down, if it already hasn’t. Keep strict stops on all open long positions.

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Resistance Found! Where Do We Go Now?

The Nifty opened on a weak note today because the Asian markets were down and even the American markets despite good gains last evening, lost strength in the later half of the day. This was not taken kindly by the Indian markets and after three blue candles, it decided to show a red one before deciding upon its next direction. But as per our analysis, the markets were in a strong uptrend and were likely to find resistance near 5300. So, what went wrong, why did the market come down today? What is the possible direction of the market now?

Attached above is the daily chart of Nifty. I know there are too many things drawn on the charts and the idea is not to confuse you. The idea is to do a little bit of analysis. And not too much of analysis too because we don’t want a situation of analysis paralysis. But just enough analysis to weigh the strengths against the weaknesses in this chart of Nifty. You can click on the chart to open it in a new window so that you can see a larger image. Let us take each point one by one. We were within a clear well-defined range between the two trendlines marked as 1 and 2. What did us in was this third dashed trendline marked as 3! Were we expecting it to happen? If yes, why wasn’t it discussed here? The answer is no, we were not expecting resistance here. We were expecting a little bit of profit booking soon but not exactly here. Why? Firstly, we were in a well defined range between the two trendlines and we weren’t expecting a third one to interfere in between. Secondly, have a look at the Relative Strength Index (RSI). The RSI has been respecting the trendline since 21st Jan 2008 and had gone well over 60 in the end of April and was clearly showing signs of bullishness. We were not expecting it to find resistance at 60, like it did this time around (as marked by the circle). One reason why the price found resistance here is because it reached the 38.2% retracement level from the 8th Jan 2008 high to 22nd Jan 2008 low. This level too was not expected to be too much of a resistance because this too has been breached a number of times since 22nd Jan 2008 without any real support/resistance. It was probably the combined effect of trendline 3, the 38.2% Fibonacci retracement level and the RSI at 60, all at the same levels, that did us in.

We now have two possibilities. The Nifty may ignore this small resistance soon and continue to go up to trendline 2, in which case the RSI may also cross the resistance at 60 and we could then expect the Nifty to cross 5300 soon too. Another possibility that may happen is that the Nifty continues to respect this trendline and starts coming down in which case it would find support near trendline 1 near 4950. In that case the RSI would also fall. And if it falls too much so as to cross the trendline, we can probably expect the Nifty too to break 4950. Another remote possibility is that this may be a small consolidation and could find support near 5000. Let us wait and see what the market decides to do.

No stocks discussed today.

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Webinar on Fibonacci Series

After the terrific response that I got to my first webinar, I have produced another one and this one is on Fibonacci retracements or the Fibonacci Series. Fibonacci series is a series of numbers obtained by adding the previous two numbers in the series. Surprisingly, Fibonacci numbers or ratios are used everywhere, intentionally, unintentionally or just naturally. It is there in the pattern in which plants grow, the numbers in which rabbits or bees reproduce, our human body, architecture, music, stock markets, astronomy, just about anywhere. You can see about it in this short video before you view my webinar.

Please leave your comments on the webinar and whether you would like more webinars to be put up in the future or are text newsletters just fine?

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Further Slide in Markets

We are fine as long as a trend is in place. As soon as the trend changes, we start looking for supports/resistances. Usually, we will be able to find multiple supports and resistances below or above the breakout points. But the markets have a mind of their own. They will choose one of those multiple levels as a support or a resistance and we don’t know which one. We can only guess where there is a maximum probability of finding support.

One of those high probability support levels was available yesterday near 5070 but the markets crossed that without a second thought. The markets became weaker through the day, probably, because the inflation data did not show any improvement. This is the 60 minutes chart of the Nifty and we find from the two trendlines visible here, that support is between 4910 and 4930. According to the pattern breakout, the target for the downmove is approximately 4920. Today again we have multiple supports available between 4910 and 4930 and there is a high probability of the markets finding support. Now, whether the Nifty does find support near these levels is up to the market to decide. We can only take action based on what the markets are telling us. As of now, they are telling us that we are in a short term downtrend and short term long positions should be avoided for the time being. A move below 4890 will give us a signal to close intermediate long positions too. Long term long positions should be maintained till 4500 is crossed on the downside.

Continuing the webinar on Fibonacci retracements posted earlier in the day, we can apply the Fibonacci retracement levels to this chart and see where support is likely. I suggest, you right click on the chart to open it in a new window so that you get a clearer picture and can read and see side by side by toggling between the two windows. Now, I have drawn two retracement levels here, one in green for the low formed on 18th March to the high formed on 2nd May (let us name it as ‘A’). And the second one is in black for the low formed on 7th Apr to the same high on 2nd May (let us name it as ‘B’). As can be seen from the chart, we are currently very close to the 38.2% Fibonacci retracement ‘A’ at 4980. Very close to that is the 50% retracement ‘B’ at 4965. The markets may find support at these levels or may decide to find support where there is a cluster of Fibonacci ratios, for example, at 4890 where the 50% retracement ‘A’ and 61.8% retracement ‘B’ are together. Or, it may decide to go further down where the ‘A’ 61.8% and ‘B’ 76.4% retracements are at the same levele at 4790. Where the markets will find support is for the market to decide.

We shall wait on the sidelines without holding any long positions and buy when the market gives us a signal that support has been found. The long trades that we have entered into in the last few days are all intermediate term positions and should not be closed unless 4890 on the Nifty is broken, unless the stop loss is hit first. If the stop loss has not been hit and the Nifty does go below 4890 then one has to take a call whether to sell there or still wait for the stop loss to be hit. I would, personally, prefer to wait for the stop loss to be hit.

Let us wait and watch where the markets find support.

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All Set to Go North

If you remember yesterday’s edition, I had mentioned that the Nifty may touch the 1 month long trendline and bounce back from there. That is exactly what happened today. The Nifty stayed within a narrow range throughout the day, but did go low enough to touch not only the trendline but also the support provided by the 23.6% Fibonacci retracement at 5102.25. We had also mentioned that Fibonacci retracements are sometimes pretty accurate. Talk about accuracy and we see that the Nifty made a low of 5101.50, accurate upto 1 point.

Other signs of support being provided are that even though the Nifty came down about 50 points today, the RSI kept hovering around the same levels and did not break 40. Both the price touching the trendline and the RSI finding support at 40 has been marked by blue circles. While the Nifty still did close in the red today but a bounce back from 5101 to 5140 in the last hour is a pretty good indication that the correction may be over.

I am a firm believer in blue chips. Over the years, I have seen lots of ups and downs in the markets and it is always the blue chips which have the power to surpass their previous highs, no matter what they are. I know there are many buyers out there with purchases of L&T above 4500 and Reliance above 3300. They may be sitting on a loss today but with just a little patience I’m sure they will end up in a profit.

Mid caps and small caps have their advantages too. We can take advantage of the momentum and speculation in such stocks. The only problem comes when we are holding these stocks and the market crashes. Technical Analysis gives us clear targets and stop losses. And without fail one of these levels is touched before the other. While we are better at closing positions near the targets (though, greed stops us sometimes), we are horrible at booking losses. This is where the third biggest enemy of ours (after greed and panic), hope, comes into play. It stops us from booking losses because we have seen on a number of occasions when the prices bounce back after our stop loss is hit. But when following technical analysis, discipline is very important. It is only the disciplined trader who wins over the others. But I know 80-90% of traders are not disciplined. And they always get stuck with small caps and mid caps during market crashes. And which is why I try recommending only blue chips. It is only during times like today when there are no blue chips available, that I take the help of other stocks. But it has to warned that discipline is very important when taking such trades.

Larsen and Toubro seems to have broken through its downward sloping trendline and seems to have completed a pullback to the trendline too. The doji day today (open and close at almost the same levels) suggests that the price may start going up tomorrow onwards. It seems to make sense because the RSI too has broken through its trendline and has gone through a pullback after the breakout so it has been moving in tandem with the price. It looks set for a target of around 3600 with a stop below 2890.

Gokaldas Exports, a midcap stock, but a market leader in its industry of readymade apparels, also has made a bullish pattern on the charts. With the volumes not showing anything except the breakout volumes today, can’t say whether it is a true head and shoulders pattern or not but it definitely looks like one. With a stop loss below 204, one can buy it above 235 for a target between 290 and 300.

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