Nifty Weakness Continuing, Next Target 5528

As I have been saying since over two months that the Nifty looks weak, the Nifty, as if listening to my analysis is doing exactly as I am predicting. This is not a good sign, at least not good for me. And the reason for that is that the market does not listen to any analyst and moves in a fashion known only to itself. And since there are a limited number of movements that the market can show, a few analysts may have their good days till the market decides to bring them back to Mother Earth. Not a good sign for me, because I'm having good days these days and only the market knows, how many days to prove me right. But, never mind that, my job is to analyse the markets and take trades in the direction of the trend and not try to fight and change the trend when the markets decide so. 

A View on the Forex (Foreign Currencies) Market

So, as expected, the market has fallen. It was probably holding on just because of the budget. As expected, the budget (being the last of the UPA - 2 regime), couldn't have been a reformist one. And because of the condition the country is in, it couldn't have been a populist one too. We are in dire need of money. With no reforms, it is sure to have an effect on the equity markets. Not only that, it will also affect the Forex markets and the Commodities markets. This post discusses just that - the effect of the Budget 2013 on the Equities, Commodities and Forex space.

A Sudden Bullishness Seen on Bearish Charts

In the first half of the day, the Nifty was still uncertain about which way to go. It opened slightly in the positive, came down in the red, went to the greener territories again and then back into the red. Just like a yo-yo. But then a surprise came. The Nifty suddenly started going up at around 1 pm and then there was no looking back for it. It went up as if it was never bearish. But does that mean the bearishness is over. Maybe, but we would need more confirmation before we change our view to bullish. What's going to happen in the future, only the market can tell us. We can only make predictions and predictions can sometimes go wrong too. The only mantra to success is that we recognise the change of trend as early as possible and not try to fight the markets when the markets have proved us wrong. Maybe, just maybe, what we saw today was the first sign of the trend changing.

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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Downward Movement Starts

The Nifty opened stronger about 30 points up on Friday but heavy selling to the tune of Rs.650 crores by Emkay Global on behalf of an institutional client led the Nifty to touch a low of 4888.20, down 899.40 points (more than 15%) below the previous close. It is said that the quantities entered by Emkay Global were erroneous and that’s what sent the Nifty into a diving spree. You can read the complete story here. Such lows/highs made by the indices and stocks due to erroneous trades should be ignored and that’s what we are going to do today. Ignore the lows. But the fact that institutions are prepared to sell worth Rs.650 crores indicates that smart money may be getting out soon. 

Attached above is the daily chart of Nifty and shows that on Friday the body of the candle completely shadows the previous day’s candle and has formed a bearish engulfing pattern. Ignoring the freak low made by the Nifty, the close itself was about 40 points lower than the previous day. This is fully in conformation to our previous view that a correction may be on the cards and that it is a time to remain cautious. As mentioned earlier, a downward move at this stage may take us to levels of 5400 or thereabouts. However, there may be minor supports inbetween at 5695, 5645, 5535 and 5435. The Nifty may go down all the way to 5400 or find support at one of these levels. 5435 looks the most probable to me at this stage but we’ll just let the market decide as to how low it wants to go. 

Attached above is the daily chart of HDFC Ltd. As seen from the chart, HDFC prices lost ground on Friday losing almost Rs.40 in a day. This downward move not only brought the price closer to the trendline, but also has shown a bearish candlestick pattern, which suggests that further downside may be there and the prices may not find support near the trendline. This view is confirmed by the MACD and RSI, both of which show a bearish divergence with the price. HDFC has shown the weakest closing since 9/11 (11th Sep 2012, I mean), the last one month. I would suggest a sell on the scrip once the trendline is broken near 740-742 with a stop loss of 775. One could expect a first target of 691 and you could continue the sell position for a second target between 660-665. 

Attached above is the daily chart of Gold alongwith my favourite choices of indicators, namely the RSI and the slow stochastics. Another one of my favourites, the trendline is also plotted on the chart. As shown here, Gold has been in an uptrend since the beginning of the chart, with regular corrections inbetween and now, after a deep correction, it has come very close to its trendline which tells us that we may be close to an intermediate term bottom. Also supporting it is the slow stochastics which is now moving below 20. By measuring the Fibonacci retracement of the rise from 30098 on 7th Aug 2012 to 32783 on 13th Sep 2012, it was found that the 61.8% retracement level is at 31105 and that is where Gold seems to have found support. Some possible scenarios that come to mind is that Gold may go down one more day next week to touch the trendline (between 30850-30900) and then rise again. The second possible scenario seems to be that Gold may hover at the current levels for the next few days and wait for the trendline to come and touch the prices. And the third possible scenario, and maybe the most probable one that Gold may start rising from here itself since it has started showing a series of reversal candlestick patterns on the charts. 4th Oct 2012 saw the formation of a bullish hammer while 5th Oct saw the formation of a harami. I would be a buyer in Gold with a stop loss below 30700 and wait for targets of 32000 and above. 

An interesting fact to note is that in the international markets, Gold has risen almost $50 from 13th Sep 2012 from $1730 to $1780, a rise of 2.9%. In the Indian markets, however, Gold has fallen from 32783 to a low of 31041 during this period, a fall of over 5%. You must be wondering, why this disparity and shouldn’t Gold be trying to play catch up now? Well, not exactly, because the US Dollar in this period has fallen from 55.375 to 52.115, a fall of over 6%. So, even though, in dollar terms Gold has gone up and in rupee terms, it has come down, it can be safely attributed to the falling dollar. Now comes the tricky part. Gold may be in for a bit of a correction (downwards) in the international markets in the coming days, and so will be the dollar (upwards). If both happen simultaneously, nothing much is going to happen in Gold in India. If Gold falls and so does the dollar, Gold in India may go down further. If the dollar starts improving and Gold continues to go up, we may be in for a sharp recovery. In this light, I wouldn’t go about keeping targets of 33000 and above but be more realistic and will probably book my profits near the 32000 levels. In rupee terms, frankly, I don’t see an extremely bright Diwali for Gold but a slightly moderate one. 

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Rakesh Jhunjhunwala Positive On the Markets

Since a number of days now, I have been talking of a target of 3800 on the Nifty. This morning because of the global weakness the Nifty opened weak and touched that target of 3800. In fact, so close was the prediction that today’s low on the Nifty happened to be 3799.55. And once the target was achieved, the Nifty started moving up. The move up was steady and consistent and so good was the recovery that the Nifty finally managed to close near the highs of the day with a gain of 30 points. The high made today was 4050.10, which means an intraday recovery of 250.55 points. Such a good day changes the outlook totally. Crude, as of now, is trading flat near $96 while gold, after a stunning $70 rise yesterday is up again by $46 or 6%.

Seen above is the daily chart of the Nifty. Three days out of the last four have displayed candles with long lower shadows, as marked by the green arrows. Two of these candles have very small bodies and, in comparison, very long lower shadows. Today’s candle, in candlestick charting parlance, is also called a hammer. And it is named a hammer not only because it looks like one but also because such candles are found near the end of a downtrend and it is said that such candles are ‘hammering out a base’. Options outlet says the following about a hammer.

So, is this the end of the bear market? Well, we can’t say for sure. The prices have started ‘hammering out a base’, inflation has stabilized, crude prices have softened and India does not seem to be having too much of an impact of the credit crisis in the US. Who knows, this may be the end of the bear market. But hey, look at the world around you. There is so much of pessimism around. Surely, India cannot remain insulated from the problems in the rest of the world. Hmm, maybe it cannot. Or maybe it can. But as far as pessimism around the world is concerned, I would again like to point out what Sir John Templeton said. He said that “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Rakesh Jhunjhunwala, according to Moneycontrol says that India is still in a long term bull market and that the current phase is only an interruption to that bull market. His logic is simple. That had we seen the market rise from 3000 to 13000 and then come down to 11000, it would have been termed as a correction. Now when we have seen so much of greed and so many excesses that the markets went to 22000 and then came down to 13000 then why are we not calling this phase a correction too? Shireen Bhan, in that context, in conversation with him mentioned that we have recently seen ‘the mother of all bull markets’ to which Rakesh Jhunjhunwala immediately disagreed and said the ‘the mother of all bull markets’ was yet to come. This conversation with Rakesh Jhunjhunwala will be telecast on CNBC this Saturday at 7:30 pm or Sunday at 10:30 pm. Watch it.

Shankar Sharma of First Global, though, remains a bear and says that the Sensex may not be able to reconquer its previous highs for the next 2-3 years and that it may come down to 10000-11000 levels.

But Vikas, where does that leave us? Do we remain bullish or bearish? Well, I have given you both sides of the market. You decide for yourself what you want to be. I, personally, am not too bearish on the markets, especially after seeing the candles formed in the last four days.

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