Reasons May Vary, But Markets Follow Technicals

Ever since the 23rd of January, when the Nifty was trading at around 6050, I predicted a deep correction in the markets. When other analysts were predicting that the markets may correct a bit and come down to 5950, I went ahead and gave a target of 4300. Crazy, wouldn't you call me? Call me whatever you may, I write what I feel about the markets. I don't care what effect it has on the sentiments of the people, I don't care what my readers will think about me, I just write what I feel. I know some will love me, and some will hate me, but nobody can ignore me. But let me ask you a question. If you were holding large positions in stocks and I tell you that we may go down to 5950, you may probably continue to hold on to your positions. At 5950, if I tell you we may go to 5800, you may probably still hold on and then I tell you that we may go to 5600, you might consider exiting your positions. But by that time you have already lost 300 points in the Nifty, and if you were holding small caps or mid caps then, God save you (because they are the first ones to come down). Wouldn't it be better that I tell you early on that such a scenario may exist so that you can exit your positions there only? You tell me what is better?

No Change in Chart Patterns - Wait and Watch

Not much change in the Nifty chart patterns today. The Nifty traded in a very narrow range today - a total movement of only 33 points between the high and the low - not even a movement of 1% during the day. After a whole day of trading, the Nifty managed to close in the green but did not make any change in the chart patterns. Individual stocks, however, showed some interesting movements, some of which have been analysed below.

Attached above is the daily chart of Nifty. As seen above, the chart looks exactly similar to the one shown yesterday, except for the last blue candle seen today. Today, as seen, was a narrow range day and also a harami, which after an upmove signifies that a short term reversal may be coming. So, nothing much to comment there on the Nifty and our view still remains the same that it should come down to the trendline before we think of buying again.

Attached above is the daily chart of Ambuja Cements which showed a decent increase today. As seen from the chart, the price came near the trendline which was providing support near 200. The stock made a low of 201 today and reversed from there and made a high of 207 before ending the day at 206.10. This candle signifies that the short term downtrend in Ambuja may have ended for now. It may be a low-risk buy at the current levels with a stop loss of 195 and a target of between 220-225 can be expected in the coming days.

Pasted above is the daily chart of Sun TV which showed a big downward movement of more than 6% today and closed the day at 343.45 against yesterday's close of 356.60. This movement comes after a small double top formation which will be confirmed below 338. Also seen on the chart are the RSI and stochastics indicators which show a bearish divergence along with the corresponding highs on the price chart. I expect Sun TV to move down to the trendline between 323-325 before any fresh buying opportunities may exist.

On the daily chart of Havell's, as seen above, a large candle showing a downwards movement, and the kind of pattern seen seems to suggest that there is more to come. The stock may find some support between 607-610 but eventually will have to break that support and may go right up down to the trendline to find support between 550-560. Stay short on Havell's below 600.

This is a pattern which I love to see, as seen on the daily chart of Oriental Bank above. This is called a Flag pattern and is so called because it looks like a flag, as can be seen from the trendlines drawn. A flag pattern is a continuation pattern and the confirmation of this pattern on the OBC chart means that the stock may continue to go up and it may have a target of 350-355 on the upside in the days to come. The only thing that scares me is the bearish divergence seen in both the RSI and the stochastics.

Seen above is the daily chart of IRB. As seen from the chart, the price of IRB showed a big downwards movement today closing Rs.22 in the red at 119, a movement of over 15% in a single day. Not only did it show a big red candle, it also closed below the good support of the trendline at 123. It now has a target of between 85-90 in the coming days. It may either go there directly or it may show a bounce-back back to the trendline at 123 in next 2-3 days. The RSI also going below 40 signifies that there is no support expected near the trendline at 123.

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Rangebound Now, Expected to Go Down

The Nifty opened at 5715 today, tried to go up, could not sustain the upmove, went down all the way to 5681 thus losing almost 40 points from its intraday high but recovered a bit to close at 5691, 26 points in the red. This downward movement may have been triggered by the world situation still looking grim and the European markets showing a weak trend during the day. The Nifty, though looking weak, has still not taken a decisive downmove, but sooner or later, will.

Attached below is the daily chart of Nifty. As seen from the chart, it is moving in a tight range between 5635 and 5730. Since the day we suggested that the downward movement has started, Nifty has not been able to break its high on that day. Of course there have been up days (3) and there have been down days (9) during this time (12 trading days) but none of the days has showed a positive sign. I'm surprised that the Nifty is still holding on.

As seen from the chart above, a decisive downward movement can be expected only when the Nifty breaks below the lower end of the range at 5635. And the blue trendline is going to provide support to the Nifty near 5470 levels. A break below the trendline is sure to make us see lower values for the Nifty but it is too early to comment on that now. As seen from the MACD attached with the chart, we can see that in the last 15 days, it has been sloping downwards suggesting weakness in the Nifty. Even the RSI not being able to cross 60 despite 3 tests suggests that there is no strength left in the markets.

Attached above is the daily chart of Pantaloon Retail, which has today shown its weakest closing of 186.75 since 18th Sep 2012. The next supports that I see on the charts stand at 177 and then 166. I reckon, it may be a good idea to sell the stock for these targets maintaining a stop loss of 200.

Attached above is the daily chart of McDowells, which is again showing a lot of weakness but still holding on. As seen from the chart, the stock is finding it difficult to go above 1300. It has a bit of support near 1200 but there is a bearish divergence seen on the charts with the RSI and the slow stochastics. The downward sloping MACD also shows weakness and it has already given us a sell signal on 12th Oct 2012. If you have holdings in the stock, it is a good time to exit while fresh short positions may be built up below 1200 with a target close to 1050.

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Weakness Still Visible on Nifty... Time to Remain Cautious

The Nifty on Friday opened with a gap up opening and never looked back. After opening at 5684 and went up to make a high of 5735 at around 10:30 and after that it was all a consistent slow and steady downtrend for the index. It finally closed at 5703 to close about 54 points in the green but about 30 points off its high. Considering that the opening itself was 35 points up, closing 54 points up does not show any significant strength.

Attached above is the daily chart of Nifty. As suggested on Thursday, the Nifty was waiting for a correction and weakness is already visible on the charts as a bearish divergence was there between the price and the RSI. But a correction was not what the market wanted. The market wanted to deceive some more buyers before going down again. While the Nifty has gone up today, it is still not showing strength. The divergence may continue one more time. But it is at these times that the buyers need to remain cautious. Every rise in the Nifty should be used as a selling opportunity.

Seen above is the daily chart of Nickel on MCX. As can be seen from the downward sloping yellow trendline, Nickel has never crossed 980 since March of this year completing 7 months now below that trendline. Notice that all this while the RSI has never gone past 60 except in the end of August which was really the first sign that Nickel is back in an uptrend. September finally saw Nickel prices go above the 7 month old trendline but overall it was a rangebound month for Nickel. The prices have remained above the trendline, yet finding significant resistance at 980. The RSI, however, is showing no signs of weakening and is showing a lot of strength till now. Looking at the pattern and the previous moves that Nickel has made, it seems that the moment 980 is broken through, Nickel is looking good for a target of 1030-1035. A stop loss of 930 should be maintained for this purpose. 

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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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Nifty Resistance At 3630, Support At 3540

Today’s movement in the Nifty was not totally unexpected. It was to be expected that the P-notes issue being eased and the CRR slash would lend a helping hand to the Nifty, which did happen because the Nifty opened with an upward gap of about 125 points. But the overall sentiment being negative, it was also to be expected that the market would eventually lose its way and come down, and that also did happen because at one point during the day the Nifty was down by as much as 50 points. But a final surge that lasted about an hour and a half took the Nifty back up to make it close with a gain of 4 points, thus making a doji for the day. (A doji, as explained in all previous newsletters, is a day where the opening price and the closing price is the same or is very close to each other. Such a candle has a non existent body but has a lower shadow and an upper shadow, the exception being gravestone dojis and dragonfly dojis where one of the shadows is also missing.) The BSE Sensex, not having the luxury of having 50 stocks in its composition and not having gainers like National Aluminium, Reliance Power, SAIL, Tata Communications and Zee Entertainment, closed about 106 points in the red.

World markets continue to be negative. Asian markets remained weak, European markets were, more or less, flat but the American and Latin American markets continue to trouble us. The Dow Jones, at the time of writing, was trading 290 points in the red while the Nasdaq Composite was almost 75 points down. Crude oil was trading at almost the same levels - $88 a barrel while the rupee versus the dollar is now touching almost 48. Gold continued to remain good – after a jump of $33 an ounce yesterday, it has gained another $24 today, obviously as demand for a safe haven increased and on speculation that the central banks may slash interest rates.

Attached above is the 30 minutes chart of the Nifty. The daily chart is not shown here but it has already been mentioned that today’s candle was a doji. A doji, after a downtrend, represents indecision and confusion and indicates that there may be a short term increase in the prices. In the chart above there are two trendlines drawn. The steeper trendline, suggests a resistance near 3630 levels. If this level is crossed decisively, then we could see it go to the next resistance, as shown by the longer trendline, close to 3850. Since the trendline is sloping downwards, every new candle will keep bringing the resistance closer. Support comes near the brown line near 3540. A move below this level would not give us any support before 3130 levels. As suggested yesterday, that is the next support level but the market, being the supreme being that it is, may find a new support before 3130 wherever it chooses. Also shown on the chart is the Moving Average Convergence Divergence (MACD), which gave us a buy signal early in the morning today and continued to remain positive throughout the day.

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Global Meltdown 'Melts' Nifty

It’s the scenario of a global meltdown today. It’s like a ship, much bigger than Titanic, which is as big as the whole world, and it is going under. Everything seems to be sinking. Let’s have a quick look at the world markets. The Nifty closed with a loss of 215 points for the day while the BSE Sensex tanked 724 points. Asian markets were down quite a bit today (Monday) with the Japanese Nikkei shaving off 4.25%, Hang Seng 4.97%, Chinese markets losing 5.23%, Singapore Straits 5.6% and Jakarta leading the pack with a loss of 10.03%. The situation in the European markets was no better with the London FTSE losing 5.77%, German DAX losing 7.07% while the French CAC lost 9.04%. As far as America is concerned, at the time of writing, Dow Jones was trading 559 points in the red (5.41%), the Nasdaq was losing 139 points (7.13%) while the S&P500 had lost 71 points or 6.43%. On the commodities front, Crude was losing 4.92% today, copper 7.62%, most agricultural commodities losing 6-7% while Gold being the ‘safe haven’ for investors was up 4.13%.

As far as the technical analysis of our charts is concerned, there seems to be no hope for the Nifty, even though there was some good news for the Indian markets. The 40% cap enforced by SEBI in Oct 2007 on Assets Under Custody through Participatory Notes (P-Notes) has now been done away with. So, now there is no restriction on P-Notes. Moreover, the RBI has slashed the CRR by 50 basis points. Both these decisions have been taken with a view to increase increase liquidity in the markets. But one wonders how much will this help when the Nifty has broken the major support level of 3800 and is even below the next support of 3640.

Seen above is the weekly chart of the Nifty showing the movement in the last two years. The portion of the chart from Mar 2007 to May 2008 has been marked with a bearish head and shoulders pattern with the neckline as shown by the green dashed line. The target for this head and shoulders pattern is 2600. It seems that the Nifty today has confirmed another, and larger, head and shoulders pattern formed between June 2007 and today. The neckline for this pattern has been shown as the solid green line. The target for this new pattern is half of the last pattern which roughly works out close to 1300 levels on the Nifty. Though, nothing is ever certain with the markets, I can say with reasonable certainty, and accuracy, that this target would not be achieved. And I sincerely hope, for the good of the nation and so many investors, that the markets do not prove me wrong here. Shown in the bottom portion of the chart is the Relative Strength Index (RSI), which continues on its way down and is not even showing a divergence, which might give us some glimmer of hope.

Some immediate support levels for the Nifty are at 3554 (minor), 3130 (reasonable) and 2600 (strong). The Nifty may go on to achieve one of these levels or can find support somewhere in between. Let us hope that this support level comes as soon as possible. But, if things do not change very soon, I’m afraid to say that we’re going to have a lousy Diwali.

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Nifty Weak Below 3800

There is nothing much to say today. I had a look at a lot of charts today. I saw the 30 minutes chart of the Nifty, the 60 minutes chart of the Nifty, the daily charts, the weekly charts, the monthly charts, had a look at the charts of various stocks too,and yet after having seen all those, I am still at a loss for words. I honestly do not know what is going to happen tomorrow or in the coming days. All I know is that from the charts of the stocks that I had a look at, things aren't looking too rosy. That obviously does not mean that things are looking bad. I can't say whether things are bad or not but they are definitely not good.

As far as the Nifty goes, I have attached the daily chart of Nifty on top. There is not too much to discuss on this too except for the last four days. As marked by the green rectangle, the prices have been moving within a small range between 3800-4000. Four days is too short a time on the daily charts to term it as a range bound movement, yet the rules/fundamentals of rectangles or trend channels do apply here. i.e. the top of the range at 4000 should provide resistance whereas 3800 should provide support. In case 3800 is broken, there is some minor support available at previous lows at 3777 and 3715 but a major support is not seen till 3635. While an intraday movement of below 3800 can be expected, a close below 3800 will be bearish. The ADX indicator, which measures the speed of a trend has also reached 24 after attaining a low of 11 which indicates that the speed of the downfall/downtrend is picking up. It pays to be cautius.

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Short Term Bullishness, Intermediate Term Bearishness

After the US bailout package was defeated in the House of Representatives on Sep 29 228-205, the Senate approved the same last night with a thumping majority 74-25, says Bloomberg. The package would be sent to the ‘House’ again Friday afternoon for reconsideration. Many republicans who voted against the package last time may reconsider and switch their votes in favour of the bailout package. Despite the Senate’s approval US stocks remain down today with the Dow Jones trading with a loss of 330 points. European markets also remained weak losing between 2 and 3%. Gold has lost a few dollars while crude has slipped to $94 a barrel. The only thing that remains strong in this kind of a market is the dollar, and who can forget our very own Nifty.

Seen above is the daily chart of Nifty. Just like it was seen a few days back, the Nifty again displayed long lower shadows on its candles, which happens to be a short term bullish sign. The 5,3 stochastics oscillator, too, slowed down by 3 days has given a buy signal. The Nifty seems all set for a short rise from here. Possible resistance levels for this short spurt seem to be near the two green trendlines drawn. For tomorrow, one of the resistances lies near 4043 and the other lies at 4075. The Nifty, on Wednesday, after touching a high of 4000.50 dropped and finally closed at 3950.75.

Well, the Nifty is displaying short term bullishness, as the charts suggests, but also, as is evident from the charts, we still happen to be in an intermediate term downtrend with the Nifty clearly showing a pattern of lower highs and lower lows since early August. Now, which of these trends will prevail in the short term is difficult to say. It could be a downtrend since there is bearishness all across the world. But that has been there since quite a few days now, yet our Nifty is displaying strength. The Nifty may decide to go up first, touch one of the trendlines, and then fall back. And finally, the Nifty may even decide to slip from where we currently are. What will be its final decision, will be seen tomorrow. Till then be careful at 4043, 4075 and 4100 on the upperside and 3800-3850 on the downside.

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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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Stochastics Too Gives Sell Signal

After flat American and Asian markets, nothing much was expected from the Indian markets too. And, as expected, the opening was nothing to talk about. Today was F&O expiry day and on F&O expiry days markets generally remain volatile. That was not the case this expiry. The Nifty, after a week opening, started going down and it wasn’t until 1:45pm that the fall stopped. But by that time, the NSE index had already shed about 80 points. A little bit of recovery came about post 2 but as the market neared closing, the movement too stopped and the Nifty slipped into a 10-15 points range after that. Today, Thursday, was a good day for the European markets and so does it look for the American markets. The London FTSE and the German DAX closed with gains of 2% while the French CAC was up 3%. The Dow Jones, at the time of writing, was trading with gains of almost 3%. Crude had increased to $108.65 intra day but had come back to $106.90.

Attached above is the daily chart of Nifty along with two moving averages and a stochastics oscillator. The chart has been zoomed in to show only 3 months data so that we get a closer look at the moving averages. The thick green line at the bottom is the support that the Nifty respected twice at 3800. Among the moving averages, the green one is the 21 day moving average while the brown one is the 10 day moving average. Both moving averages are important and provide good signals in their respective time frames. Here, as discussed in one of my previous newsletters, the prices had come below the 21 day exponential moving average and had given a sell signal on 11th Sep 2008. The 10 day moving average also gives similar signals, except that it gives a quicker response than a 21 day moving average. Here, the prices are below both the moving averages and both of them should provide resistance to the Nifty. The 10 day moving average provides resistance near 4170 while 4229 happens to be the level for the 21 day moving average. As regards stochastics, the 5,3 day stochastics slowed to 3 days has given us a sell signal yesterday.

With the American and European markets good today, chances are that we might open strong too. In case we don’t, or if we do and then come down then support comes in near the green line (the thinner one) near 4073-4075. A move below this level should, rather could, bring us to levels of 4000, 3950 and possibly 3800. With the new F&O series taking over tomorrow, let us see how it makes the Nifty behave.

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Nifty Inside Contracting Triangle, Wait for Breakout

The Nifty remained range bound today. After opening with a slight positive gap it went up a little further but shortly before 1pm, it started its downward journey. Around 3pm, after it recorded its low of the day, a little bit of recovery came about, especially in the last 30 minutes, which helped the Nifty close with a gain of about 34 points. International cues too do not suggest anything. Asian markets closed flat with a slight positive bias while European markets had a slight negative bias in them. American markets, at the moment stand completely unchanged and the Dow Jones, till now today, has had a small intraday movement of about 100 points. Crude is flat too and is currently trading near $105.

Seen above is the 30 minutes chart of the Nifty. As can be seen, the Nifty is making a pattern of a right angled triangle with a straight bottom. The prices, for the last four days have been contracting within this triangle. Such straight bottom triangles are essentially bearish patterns but my experience tells me that with them the direction cannot be predicted. The best way would be to wait to let the prices break out of the triangle and we then take a position in the direction of the triangle. For tomorrow, the levels are between 4115 and 4200. Buy above 4200 or sell below 4115. If the pattern is broken on the downside, then we could have a target of 3990 on the charts.

At the moment, the MACD is hovering around zero and the MACD line is moving so close to its signal line that it suggests a lot of confusion and indecision in the markets. And obviously, a contracting triangle and trend channels, in themselves, are signs of confusion.

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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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Minor Resistances Close By, Short Term Trend Up

The Indian markets saw two days of amazing gains when all the world markets were displaying weakness. Bad news now does bring the markets down but the markets are not being able to sustain the weakness. The bulls have a clear advantage now, at least in the short term. On Friday the Nifty opened with an upward gap of about 100 points and surprisingly continued in the same direction. Friday, in fact, was a good day for all markets over the world. The Asian markets were between 4% and 10% up with Hang Seng leading the pack with gains of 9.61% and Shanghai following a close second with 9.46% gains. The Indian markets, as we all know, were more than 5% up with Nifty closing with gains of 207 points and BSE Sensex jumping 726 points. The European markets also closed with gains between 5 and 10% with the French CAC jumping 9.2% and London FTSE gaining 8.8%.

Seen above is the daily chart of the Nifty, which shows the big jump in the last two days. 450 points in 2 days. This rally came after the head and shoulders target was achieved at 3800, which also happened to be a major support as the lowest low (actually 3790) formed in recent times (July 2008). A rally should have come back and found resistance near the neckline at 4200 but there was not even a hint of resistance at those levels. The Nifty easily crossed 4200 and after making a high at 4262, finally ended the day at 4245. There is some bit of resistance near current levels at 4250, at 4300 and then 4350. A major resistance comes in at or near 4500. An indicator added on the charts today is a 21 day exponential moving average which usually gives very good support/resistance levels in trending markets. This can be seen on the chart shown above too. The 21 day EMA level for Friday was 4264 and the Nifty made a high of 4262.65. Coincidence? No, it happens a number of times. If this indeed is a trending market then a break above this should be decisive. Not only that, it will also then act as a support if the price were to come down. But what if it is a sideways market? Well, then we should see the price coming down below it soon enough. The moving averages have also proved, time and again, that they are useless in sideways markets.

Now since 4200 was a significant level for us and since the price has now managed to move above it on Friday, it should now act as a good support for the Nifty. One could consider buying in the short term with a stop loss at 4200. One may think of using the ‘trailing stop loss’ technique as each level of 4250, 4300 and 4350 is ticked off by the Nifty. Consider exiting beween 4450 and 4500.

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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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Nifty Slips Into Another Range, Gold Shoots Up

The Nifty today opened weak, stayed weak, made a weak attempt to recover after noon but failed and became weaker after the European markets opened weak. So, there is weakness all around. The only thing that’s not weak is Gold, which went up sharply today rising $84, almost 11%.

After breaking down from the double top pattern formed on the 30 minutes charts a few days ago, the Nifty achieved its target at the opening bell of the third day. After achieving the target, the Nifty has now slipped into another range, this time on the 30 minutes charts, as seen above. This range is between 3950 and 4100. While the target on the daily charts remains 3800, it will be only after this range is broken through on the downside. In case the prices break out decisively above this range, that target of 3800 will be cancelled, at least for the time being.

If the prices do break out of this range on the downside, what will be the target on the 30 minutes charts? Well, this range is 150 points wide (4100-3950) and a breakdown will give us an additional 150 points which gives us a target of 3800 (3950-150). So, well, that conforms to our views/target on the daily charts.

That’s fine, but which side is the market likely to break out on? Well, we don’t know. That is what happens in a range. In a range, not only is the market confused/unsure, it confuses us too. Well, we may get some early indication from oscillator indicators when there is a divergence visible, but in this case the Relative Strength Index (RSI) is also not showing any visible divergences. This means, that we shall have to wait till a divergence is visible (which may or may not come) or for the market to come out of the range. So, for now, it is buy above 4100 and sell below 3950 (in the short term). Investors are advised to wait for now and not take any long positions, at least not till the market either achieves 3800 or breaks out on the upside above 4100.

But the international markets may provide some cues. There is some good news from the US. The Fed government has agreed to bail out AIG by giving them a $85 billion loan (that will be repaid by liquidating the company) in exchange for a 80% stake in the company. But there are fresh concerns about Morgan Stanley and Goldman Sachs (the two remaining independent securities firms), the result being that, at the moment, Dow Jones is trading 240 points in the red while the Nasdaq has lost 75 points. Crude remains flat near $97 a barrel. So, all in all, it looks like we are going to have a downside breakout from the range that we are in.

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Head and Shoulders Confirmed, Pullback to 4200 Possible

First of all I would like to apologise to my readers for not being able to post my comments on the markets yesterday. Though, I love writing and sharing my technical views with my readers, but there are days when I have meetings with clients in the evening and sometimes over dinner and those days it becomes difficult for me to post my views. Anyways, I am back today.

Saturday evening, Delhi was rocked by serial bomb blasts. By opening on Monday morning there was news that Lehman Brothers had filed for bankruptcy and that Merrill Lynch was being sold out to Bank of America. The US government confirmed today that Lehman Brothers would not be bailed out. Insurance giant, American International Group (AIG), has asked the Fed for a loan of $40 billion and it is uncertain as yet whether it would help or not. With such news floating around in the market, the markets were bound to go down and the trading range between 4200-4650 was finally broken, but on the downside.

As of today, the London FTSE closed 120 points down losing 2.3%, the German DAX lost 1.12% while the French CAC was virtually unaffected losing only 0.81%. The Asian markets were much worse today (Tuesday) with the Hong Kong Hang Seng losing 5.44%, the Japanese Nikkei 4.95%, the Shanghai index 4.47% and the Korean Kospi losing 4.6%. Compared to them, the feat which the Nifty accomplished was mind boggling. After losing more than 153 points at one point during the day, the Nifty still managed to close in the green, albeit only 2 points.

Attached above is the daily chart of Nifty with the Relative Strength Index (RSI) at the bottom. As seen from the chart, the Nifty has displayed a large head and shoulders pattern formed over a period of almost two months. This bearish head and shoulders pattern gives us a target of 3800 on the charts and it is quite possible that we may achieve that. Looking at the candles formed over the last two days. Both these candles have long lower shadows and today’s candle was a doji with a very long lower shadow. This should be bullish for the market in the short term. And, technically too, in all patterns which witness a breakout, on a number of occasions there are pullbacks. In this head and shoulders breakout too, we may see a pullback which means that the prices may retrace back to 4200 or nearabouts before continuing on their way to 3800.

A few days back I received, on my blog, a comment from Krishnamurthy, who said that he is short in Nifty since 4500 levels because he believed that Nifty had completed the 2nd wave zig zag and that had started the 3rd wave down. Krishnamurthy once sent me an e-book on Elliott Waves and gave me a couple of helpful tips. While I am a novice in Elliott Waves, Krishnamurthy has done a lot of research on it. Krishna, if you are reading this may I please invite you to contribute on my blog from time to time so that not only me, but all my readers too may benefit from your analysis. Please send in your articles to me by e-mail and I’ll post them on to the blog.

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Nifty At Crucial 4200 Support, Wait for Next Move

As expected the Nifty, after making a confirmed double top pattern on the 30 minutes chart, came down. Though, the target for this double top formation was 4160 but there was support on the daily charts at 4200. The Nifty respected this support, made a low of exactly 4200.15 and then recovered to end the day at 4228 to close 62 points down while the BSE Sensex ended the day with a loss of 323 points. European markets were good on Friday and ended the day with gains between a percent and 2 percent. The American markets, however, were flat. Crude also remained, more or less, flat and maintained support at $100 to end the day at $101.

Seen above is the daily chart of Nifty and, as can be seen, the Nifty has now reached the bottom end of the range at 4200. It is expected to find support at these levels, unless it proves otherwise. In the bottom half of the chart is the Relative Strength Index (RSI) and that shows that it has not yet reached 40 (it is at 42, to be precise). The price at the support level and the RSI still above 40 may indicate that the support maybe respected by the markets. In case they don’t and 4200 is broken decisively on the charts then we may be staring at 3800 in the face.

Since we know that we are at the support level, this may be a good time to buy Nifty futures or Nifty calls. If the markets were to break 4200 then we shall close our long positions with a small loss. For the record, Nifty 4200 calls are trading at Rs.138/- while 4300 calls closed ar Rs.90/- per Nifty. The lot size happens to be 50 Nifties.

Update: The Rupee to Dollar exchange rate has moved up to Rs.46 to a dollar. Last time the dollar touched 46 was on Sep 29, 2006. Asian markets have opened and are trading weak with losses between 2 and 4 percent. Nifty in the Singapore market is 155 points down at 4070. Expect Nifty here too to break 4200. Do not take any long positions.

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Double Top Formation in Nifty, Target 4160

The Nifty, contrary to our prediction yesterday, went down today. The short term signs of bullishness were cancelled the moment Nifty opened below our stop loss of 4380. The Nifty continued to move down throughout the day and finally ended the day with a massive 110 point loss while the BSE Sensex lost 338 points in the day. The European markets closed roughly a percent and a half down while American markets at the time of writing were, more or less, flat with a slight negative bias. Crude continued to move down and bounced back from $100 today and is currently trading at $101.60 to a barrel.

The 30 minutes chart of the Nifty, shown above, shows that not only were the signs of bullishness cancelled on opening (as shown by the green arrow) but the next hour also confirmed a double top formation, which is also known as a ‘M’ formation or an inverted ‘W’ formation. This pattern has been marked on the chart with thick green lines. This double top pattern has its neckline at 4340 and the top at 4520, which means it could have a target 180 points below 4340 which converts to a target of 4160 on the charts. Also shown on the chart is the Moving Averages Convergence Divergence (MACD), which had given a sell signal on the afternoon of 8th Sep 2008, is still maintaining a sell. The stochastics oscillator (shown in yesterday’s chart), which had given a buy signal yesterday continues to maintain a buy position.

On the daily charts, as mentioned in previous posts, the Nifty is moving within a range of 4200-4650. A breakout out of this range should give us a tradeable move in the intermediate term. But will the prices break out of this range this time? Well, we can’t say at the moment because the markets have a mind of their own and will do what they want to do. But the principles of technical analysis tell us that we should follow a trend and that a trend is thought to be ‘innocent’ till it is proved ‘guilty’. In this case, the trend is that the price finds support at 4200. So, we shall assume that prices will find support again near 4200. But Vikas, you just said that the Nifty is now bearish and has a target of 4160. Well, yes, I did say that. The short term charts tell us that the Nifty should, rather may, come down to 4160 while the daily charts suggest that it will find support at 4200. Whenever there is such a situation, we shall follow what the longer term charts say. It is also possible that the Nifty may go below 4200 on an intraday basis and yet close above it. Or that it may go down to 4160 on one day and come back into the range on the next day. While we shall assume the Nifty to find support at 4200 but what the market actually wants to do will be known after the event. We shall change our strategy, if the need be, once the market decides to move against us. For now, it is support at 4200.

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