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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Inflation and Crude Oil Technical Analysis

The topic of my discussion today is crude oil. But because of the increasing oil prices we saw a hike in the prices of petrol. That will increase the inflation, so let me talk about inflation. With increasing inflation, the markets will come down, so let’s change the discussion to the markets. But this oil price increase may be because of the weakening dollar. Shall we talk about the dollar then? There are so many things to talk about, why limit ourselves to one topic. I’ll just write type whatever comes to mind.

Let us take a very simple example. Let us assume that milk and cows are not easily available commodity/animal. Let us assume that you have 5 cows with you (lucky you) and that you get about 50 litres of milk a day. Since milk is not easily available you don’t want to sell it all and would like to keep some for your future use, so you freeze it. And since your neighbours are buying from you, you sell about 28-30 litres in a day, consume 2 and freeze the rest. Now, your cows are getting old and their milk giving capacity is going down. You know that in a few months time you will be left with no milk. Your neighbours are requesting you to start selling 40-45 litres a day. Obviously, you won’t do it because when the cows stop giving milk, you could charge a fortune for a litre of milk.

Now let us say that the cows will give milk only for 6 months more, which is 180 days. At your current rate of 20 litres a day, when the cows stop giving milk you would have 3600 litres of frozen milk with you. The neighbours have been paying you with a kilo of rice for each litre of milk. But rice is easily available and its value is going down. And because of the value of rice going down, you have started asking for 1.2 kg of rice for every litre of milk. And because you are selling less your neighbours are even willing to pay 1.5 kg of rice for a litre of milk. You know that your 3600 litres of milk which was worth 3600 kg of rice, will now get you 5400 kg of rice. So, in effect you are richer by 1800 kg of rice without doing a thing. Would you sell more milk or just keep building up your wealth which is now increasing without even selling?

This is exactly what is happening in the world today. Just substitute crude oil for milk, the oil rigs for the cows, the Arabian countries owning the oil rigs for yourself, the rest of the world for the neighbours and the US dollar for rice. It is all so simple. Why would they sell more oil when their net worth is increasing every day because of the depreciating dollar? Why would they sell more when they know that 20-30 years down the line when the production is zero, the crude will be worth much more? Why would they sell more when they could get a fortune for a barrel of oil 30 years down the line?

Inflation jumped to 8.24% for the week ended May 24, 2008. On Wednesday, the government hiked the price of petrol by Rs.5/- per litre, diesel by Rs.3/- per litre and LPG by Rs.50/- per cylinder. The government says this hike could increase the inflation by 50 or 60 basis points. But inflation is not only affected by fuel price hike. This fuel price hike will have a cascading impact on all sectors from industries to agriculture and even services. The worst hit, as is easy to understand, will be the transportation sector. It will also mean increased house rents because the cost of construction material will be pushed up by the cost of transportation. And since almost everything needs to be transported before and after production, this hike would affect everything. In time, the food will also becoming dearer, and now with the LPG hike even cooking the food is going to become costlier.

The Economic Times says that historically a Rs.2/- per litre hike in petrol and Rs.1/- per litre hike in oil pushes up the wholesale price index by more than a point in the subsequent two weeks. The LPG price had not been increased since 2004 and this time with a Rs.50/- per cylinder hike in LPG and Rs.5/- and Rs.3/- hike in petrol and diesel respectively, the wholesale price index could move up about 4 points (though the Economic Times says only a point and a half) in the week ended 7th June, the figures for which will be released on 20th June, 2008. This would push the wholesale price index to about 234.5 to 235. A figure of 235 would translate into an inflation of over 10.48% since last year in June the Wholesale Price Index was 211.8.

Coming back to crude, the crude price jumped by more than $10 a barrel on Friday to a record high of $138.54. Did the government do something wrong in increasing the petrol, diesel and LPG prices? Absolutely not, but it came too late. This was a decision which should have been taken months ago. With the reformist finance minister, Dr. Manmohan Singh heading the government, we didn’t expect such a good economic decision to come so late in the day. But maybe the government was just waiting for the Karnataka assembly elections to get over. But the decision took more than 10 days after the elections to be announced. Every single day was adding up several crores of rupees of losses for the oil companies. But in the end such a drastic hike was a bold decision by the government. But despite that, Petrol sold in India is still about Rs.10/- per litre cheaper than what price it commands in the rest of the world. But where is it headed? $150 a barrel is not too far away and there even have been predictions of $200 by the end of the year. Let us do some technical analysis.

Seen above is the daily chart of crude oil near month futures listed on Multi Commodity Exchange (MCX) in Rupees. In this chart we are not taking the help of any line studies or indicators. The only thing on the basis of which we are trying to predict is the Elliott Wave Theory. Applying the Elliott Wave counts to the above chart, we can see that we are currently in the 5th wave. All waves have been marked as 1,2,3 and 4. 0 is where we have started the wave count from. You can also notice that within wave 3 also there are 5 waves which have been numbered in brown colour to avoid any confusion. Wave 1 was Rs.1076/- long while the length of wave 3 was Rs.1838/-, which clearly shows that wave 3 was the extended wave. This means that wave 5 should be, more or less, as long as Rs.1076/-. From the end of wave 4, this gives us a target of Rs.6288/- per barrel for crude when wave 5 ends. A target of Rs.6300/- would translate into a price of $148/50- per barrel in dollars. There the crude should, rather, could make a short term high, at least.

More tomorrow. Happy Investing!!!

Markets Tumble as Crude Advances

The US markets (Dow Jones) was down over 200 points last night (Thursday) on concerns of crude oil reaching a record high of $123 a barrel. Even the Asian markets were weak this morning and we were bound to go down with weak global cues. It was because of this reason that the Sensex opened more than 200 points down while the Nifty opened about 50 points in the red and then stayed down all through within a range of only 30 points throughout the day.

We have the 30 minutes chart of the Nifty with us today and there are some observations that we can make from it. The support trendline on this chart is lower than it was on the 60 minutes chart. Here we have support from the trendline at around 5070, which has not been broken as yet. The highs made between 5065 and 5070 on 22nd, 24th and 25th of April also provide support at these levels, which has been signified by another trendline. And then we have another trendline, and this time a downtrending one, which signifies that prices should go up if they cross this trendline at 5100. This last trendline, if seen in conjunction with the RSI signifies a positive divergence, which means that while the prices have been coming down during this period, RSI has remained more or less stable. There is another trendline, which connects the high made on 7th April and the lows made on 15th and 16th April, which also provides support at 5070 but that has not been shown here to avoid two things – firstly, and more importantly, confusion, and secondly, excessive analysis, because excessive analysis leads to paralysis, also known as analysis paralysis, says Chris Garrett.

The price of crude oil has more than doubled in the last year and a half, has become six times in the last six years and has become eight times in the last nine years. Some of the causes of rising crude oil prices have been discussed in one of my previous posts titled “Renewable Energy”. Incidentally, this article has also been published on Reuters.

This article on Bloomberg writes that countries like China, India, Russia and the middle east may be responsible for the rising crude oil prices. A few days back President Bush too attributed the rising food cost to China and India. While that may have been a little far-fetched to swallow, Bloomberg (rather, the International Energy Agency in Paris) may well be right about its claim, though if we compare the per capita consumption, US is still consuming 10 times the energy than India does.

Dance with shadows says that The burden of the rising crude price has a huge bearing on the profitability of many industrial units in India. Commodities such as aviation turbine fuel (ATF), naphtha and bitumen have witnessed a huge price increase during 2007-2008. These products are selling at market-determined prices. Their prices are up by 27-39% year-on-year. It is expected that the rising price would have a huge impact on air travel, power and polymers sectors directly. We need to prepare to pay more for most manufactured products in the future.

This clearly shows that these increasing crude prices will have an effect on the inflation in our country and CRR hikes and interest rate hikes may not be the only solution. Maybe that is why the markets went down today, fearing the worst. It could very well be the same tomorrow, depends on global cues. Plus, the inflation data is also due out tomorrow. Let us cross our fingers and hope for the best. Technical Analysis does help buy but sentiment holds the key.

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RBI Credit Policy Along Expected Lines

The Nifty again remained volatile today, as was expected. The RBI Credit Policy announcement today made it all the more volatile. With a 75 basis points cut by Mr. Ben Bernanke, the US Fed Reserve Governer announced last week, some people in India were expecting a rate cut too, at least a 25 bps cut, if not more. But our RBI Governer, Dr. Reddy, is a tough economist and did not follow the Bernanke route and left all key policy rates untouched. But even though there was no rate cut, yet, the Credit Policy had a more neutral stance this time as against the hawkish stance it took last time.

The rate cut not being announced today brought down all the banking stocks and the two banking charts in our newsletter yesterday, which were looking good till the policy was announced, remained underperformers. However, Tata Tea, which was also recommended yesterday, was on fire today and went up by 7.2% to close near 850 after touching a high of 895.

Coming back to the RBI Credit Policy, in short, it looks like this:

• RBI keeps key policy rates unchanged
• RBI keeps repo rate unchanged at 7.75%
• RBI keeps reverse repo rate unchanged at 6%
• RBI keeps CRR unchanged at 7.50%

A lot of people were expecting that the RBI Governer may not announce a rate cut just yet and the arguments given by him were what many expected. That money supply is at 23% against a target of 17-17.5%. This means, basically, that too much money in the system can always ignite inflation, and therefore a caution on that area was required.

Abheek Baruah, the Chief Economist at HDFC Bank had the following words to say.

• “With the kind of clarity that has come from the policy where the RBI is not likely to tighten further, perhaps banks could take advantage of this and reprice both lending and deposit rates."
• "I think growth hasn’t slowed drastically enough to completely offset inflation worries and I think across the world, the Fed and perhaps the Bank of England being an exception, most Central Banks seem to emphasise inflation concerns rather than concerns about slowing growth. This could change if the US indeed plunges into recession and there are ripple effects across the world. As of now, the tilt is towards inflation among most Central Banks but this could change going forward and I would think that the second half of this calendar year might just look very different.”

In a nutshell, this is what the RBI credit policy had to say.

• Headline inflation picked up since December 2007
• Liquidity management to be priority for policy
• Inflation to go up even if fuel prices remain unchanged
• Upside risks to inflation to increase going ahead
• Flexibility to change reverse repo, repo rates
• CRR unchanged on preview of current liquidity situation
• Financial markets warrant careful monitoring on large forex flows
• Emphasis on price stability, anchoring inflation
• Retain inflation aim of 4-4.5% for FY08, 3% in medium-term
• To maintain GDP growth target of 8.5% for FY08
• Can't exclude likely Forex flows reversal on global sentiment

That's all for today. Trading opportunities will be identified in tomorrow's newsletter. No trading opportunities studied today.

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