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.

Nifty Falls To Support, May Bounceback

The Nifty kept falling and finally, according to our forecast since September, went down to touch that trendline yesterday and then again, today. It opened today at a high at 5605, kept falling throughout the day till it made a low of 5548 and then posted a smart recovery towards the end of the session to close at 5571.

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.

Maybe The Credit Policy Will be The Trigger

Another narrow range day for the Nifty today. Opened with a slight gap up, continued its way down most of the day but showed a smart recovery of about 20 points in the last hour of trading and closed slightly in the green - just 1 point up. As of now it is continuing to trade in the range of 5630 to 5725. The cabinet reshuffle had virtually no effect on the Nifty. Maybe RBI credit policy will act as a trigger for the breakout from the range. Let's see whether it does happen tomorrow or not. The market is expecting the rates to remain unchanged or at the most a 25 basis points cut in the CRR.

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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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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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 Breaks Down Further, Support Between 4160-4200

Exactly like yesterday, the Nifty opened flat today and almost immediately started losing ground but stabilized soon and then went into a narrow range and kept trading in those levels for most of the day. The bears, finally, took the index below the lows of the day when only an hour of trading was left and the index ended the day about 78 points in the red. The Nifty still remains locked inside a range of 4200-4650. As mentioned in earlier posts, a clear trend would come about if this range is broken on one of the sides. Or when the ADX indicator line starts rising again. This line seems to be stabilizing near 14. Such extremes are rare in the ADX and this clearly shows that a trending should now come about soon enough.

Seen above is the daily chart of Nifty and shows the range within which the index remains locked. The lower end of the range is shown at 4200. However, as explained in yesterday’s post, the index has broken a symmetrical triangle within which it was moving on the downside. The target for this downside breakout is 4160. If we look at the chart above and notice the pivot low which was formed in the end of July, the value happens to be 4159. So, this 4160-4200 range may provide good support to the Nifty. Looking at the Relative Strength Index (RSI), we find that it is now very close to 40. If the RSI does find support near 40, it may mean that all is not lost yet. A breakdown below this range of 4160-4200 should definitely take the RSI below 40 and that would be negative for the markets, and we could be looking at 4000 or 3800 then. Alternatively, if the Nifty were to find support near these levels and the RSI near 40, then the outlook remains, more or less, the same that we would still be in a sideways market but would be saved from the downside, for some time at least.

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Nifty May Perform Poorly

As expected, with global cues being strong, the Nifty did open with an upwards gap of about 70 points and then stabilized around those levels till about 12:30pm and then commenced falling. The fall was sharp and severe and the gap with which the market opened, was filled/closed today itself. The Nifty closed exactly at the same level as yesterday’s close and thus formed a gravestone doji. If one looks at the chart, it does not exactly look like a gravestone doji because NSE takes the closing price as the average of the last 30 minutes of trade. Taking actual closing prices of yesterday and today, one can realize that this is a gravestone doji. This is what Street Authority says about a gravestone doji.

As I said in yesterday’s post, the Nifty has been alternating between up days and down days since the last 5 days. Though, today also happens to be a day marginally in the green, yet a gravestone doji (or a candle with a long upper shadow and a small body) is a sign of weakness. This should bring the markets down and the Nifty may finally find support between 4150 and 4200. If 4150 is also broken on the downside, we should be looking at a target between 3800 and 3900. The trend, as yet is not clear. We are in a short term downtrend while the intermediate term is sideways. To predict/forecast analyse, what will happen in the short term and the intermediate term, I am doing the analysis on both the 30 minutes charts and the daily charts.

Attached above is the 30 minutes chart of the Nifty. Seen on the chart is a trendline joining the different pivot highs and lows made during the month of August. Shown in the bottom portion of the chart is the Relative Strength Index (RSI) and superimposed on the prices is the Moving Averages Convergence Divergence (MACD). Let us discuss each one in detail and try and analyse which way the prices will move in the immediate short term. First, let us look at the RSI. The RSI today made a pivot high higher than the last pivot high which was made on 20th. The prices corresponding to these highs are seen making lower highs. Looking at the lows formed in the Nifty on 18th and on 22nd, the RSI at the same time is seen at the same level and is not making newer lows. So, as marked by the green arrows, there are two instances of a positive divergence occurring between the price and the RSI. But a divergence is just an indication of a reversal and not a confirmation. A confirmation will come if the trendline is broken towards the upside, i.e. if the Nifty were to go above 4370. If it turns back tomorrow and does cross 4370, it would also have made a small bullish head and shoulders pattern, the target for which would be close to 4520.

But like all coins, this has a flip side to it too. Coming back to the RSI, as marked in the circles, we can see that the RSI is finding resistance near 60, which is not exactly a sign of a bull market. Looking at the trendline, we can see that today was the sixth occasion that the Nifty tried to go above the trendline in this month but failed. Assuming that this would continue to provide resistance would be bearish for the markets. Also looking at the MACD which has been superimposed on the prices, we can see that unless the Nifty recovers drastically tomorrow, we shall get a sell signal from the MACD too.

Above is the daily chart of the Nifty and an attempt has been made to study the intermediate term trend of the Nifty. As mentioned yesterday, the Nifty has now entered a sideways phase between 4200 and 4650 and would not give us a clear signal till it comes out of this range either on the upside or on the downside. If we have a look at the RSI, we can see that it has now broken the trendline which was providing support to it since the last few days and has bearish implications. These bearish implications would be cancelled if the RSI finds support near 40 and turns back. As far as the MACD is concerned, as mentioned in a post a few days ago, the sell signal which was generated is still valid and again has bearish implications for the markets. So, all in all, I am expecting the markets to perform poorly in the next 2-3 days.

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Multiple Supports For Nifty Between 4330 and 4380

The Nifty went down the fourth day in a row today. That was what this column had been expecting since 6th Aug 2008. To read the analysis of the past few days, you can read the newsletters for 6th Aug 2008, 7th Aug 2008, 11th Aug 2008 and 12th Aug 2008. All this prediction about the fall was made while the market remained in a narrow range and before the actual fall started. Now it has been 4 days into the fall and there are signs of support coming in.

As mentioned in yesterday’s post, there are supports available on the 30 minutes and 60 minutes charts between 4330 and 4350 and on the daily charts near the neckline of the head and shoulders pattern, which could be anywhere between 4330 and 4400. Seen above is the daily chart for Nifty. This chart has three new trendlines drawn and all of them suggest support just below today’s low of 4379. With so many supports available between the 4330 and 4380 levels, there is quite a possibility that this support may hold. In case it does hold, and the Nifty crosses today’s high of 4448, we should become buyers. In case we encounter weakness tomorrow and the Nifty comes below 4330, we are looking at more downside which may (or may not) find support near 4200. Looking at the Relative Strength Index (RSI) also, it can be seen that there is support for it too near the trendline. Despite a fall of 270 points in the Nifty, which works out to roughly 6% fall in the index, the RSI has fallen from 64 to 50 only.

Since so many supports are available at 4330, we should assume that this support is likely to hold. And if it is broken, it will be quite significant for the markets and while the next support is available near 4200, even that may not hold. What the markets actually decide to do is for the market to decide. For tomorrow (today) the plan should be to go long above 4450 and go short below 4330.

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Nifty Displays Bullish Head and Shoulders Pattern.

The Nifty opened flat in the morning today and kept trading within a narrow range and was repeatedly finding resistance near 4420 and it wasn’t until 1PM, after the European markets opened, that it started rising again. The European markets closed very well in the day today with gains over 2 and a half percent since yesterday’s close. Even the Dow Jones right now is trading more than 200 points up in the green. Looking at the crude, after touching lows near $118, it is currently trading at $119.50. 118.20 to 118.50 seems to have provided good support to the prices today.

Attached above is the daily chart of Nifty, along with a few trendlines drawn in and the Relative Strength Index (RSI). Let us start with the longest trendline in the chart which has been drawn from the beginning of May till date and which has been shown as a dotted trendline. This trendline was quite comfortably passed through during the day today. A second trendline, which happens to be shown as a solid line green in colour, has been drawn from the beginning of June till date. This also happens to be the neckline of the inverted head and shoulders pattern, which has been marked as S, H and S. A vertical line AB has been drawn from the neckline to the bottom of the head formation. This line has then been superimposed at the point of breakout (??) today. This superimposed line AB gives us a head and shoulders breakout target of 5200. It is not clear whether the head and shoulders pattern has been broken through or not yet. I feel it just fell short of confirming it. We would assume that this pattern has been confirmed if the previous pivot high at 4540 is surpassed, which happens to be another 40 points away. If that does happen the RSI also would cross 60, which would have happened in Nifty the first time in three months and only the second time since January, when the downfall started.

Is there anything that could go wrong? Yes, if it happens to be your bad day, everything could go wrong. Looking at the chart, we can see that the head and shoulders pattern has not been decisively confirmed today, which means that it could very well start coming down from here. Looking at the RSI too, we can see that the resistance at 60 has not been crossed as yet. If the Nifty turns down from here, 60 would not be crossed and it would be bearish for the index. If, on the other hand, the RSI crosses 60, we should be looking at further gains. On the downside, a move below 4140 would cancel this bullish head and shoulders pattern.

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Lackluster Day for the Nifty

The Nifty opened flat today with a slight positive bias. All through the day, it maintained a very narrow range of about 40 points. It did move up and down about 2-3 times during the day but all through this range of 40-45 points was maintained. A slight dip in the first fifteen minutes found support near the trendline discussed yesterday (and today). The Nifty, as predicted that it might, reversed from that trendline. But then all through the day it remained lackluster, which is worrying.

Attached above is the 30 minutes chart of the Nifty. Just like yesterday’s chart this also comes attached with the same two trendlines and the 14 period Relative Strength Index (RSI). There are some negatives and some positives to this chart. Let us look at the positives first. First of all, support was found at the lower trendline and it moved up from there. Secondly, the upper trendline was broken through, which again is a positive for the National Stock Exchange (NSE) Index. Thirdly, the RSI is finding support at 40 repeatedly as marked by the brown circle.

But, as I said there are some negatives too. Firstly, the trading throughout the day was dull and boring and even after the breakout above the trendline, there was no enthusiasm which suggests that things may not be all that good for Nifty. Secondly, international cues are not too good. European markets closed more than a percent in the red. Dow Jones, at the time of going into print, is trading about 200 points down while crude is attempting a recovery, though it is not very successful at the moment.

All we can say for tomorrow is that the Nifty seems to have slipped into another trading range, though, a much narrower one, between 4280 and 4380. A move above 4380 should be bullish while a move below 4280 should be bearish in the short term. Long term and intermediate term investors should wait for the pullback to complete before taking the plunge.

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Serial Blasts in Bangalore and Ahmedabad

After five days of excellent gains, the Nifty did cool down a little with two days in the red too. After a loss of 43 points on Thursday, it went on to lose 121 points on Friday. Nifty was trading within a narrow range of 30-40 points till about 1 PM. After that for the next hour or so it staged a good recovery and crossed the highs of the day. But at 2PM came the news that Bangalore was rocked with 7 bomb blasts in a space of 75 minutes which left 1 dead and eight injured. Thankfully, they were all low intensity blasts and were blasted more to create panic than to cause destruction. That news sent the market crashing down and the Nifty finally closed with a loss of 121 points at 4312.

Attached above is the 30 minutes chart of the Nifty with the Relative Strength Index (RSI) at the bottom. Also, on the chart, are an upward sloping trendline and a trend channel between 3800 and 4200. As seen from the chart, the upward sloping trendline is providing support to the prices at 4285. In case this support does not hold, the prices may come further down to the trend channel near 4180-4190. One reason why the prices should find support near the trendline is the RSI. The RSI, as can be seen within the thick brown circle, is finding support near 40. And the RSI finding support near 40 is bullish for the markets, at least in the short term. Three examples of the RSI finding support near 40 have been marked with the green circles and green arrows on this chart itself.

However, things look pretty bad. After 7 blasts in Bangalore on Friday, Ahmedabad was rocked with 16 bomb blasts in a span of 70 minutes leaving 45 dead and 145 injured. Apart from this there was a live bomb found in Bangalore, one in Ahmedabad’s Amraiwadi area and two cars with explosives were found in Surat. The blasts were claimed by a militant outfit calling itself Indian Mujahideen and they even threatened Mukesh Ambani with ‘horrifying memories which you will never forget’. This surely, could bring the markets down. And in case 4285 support is broken, that will then become a resistance. Even if support is found at 4285, there is resistance nearby at the downward sloping trendline near 4340.

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Pullback Starts, Nifty Closes 43 Points in the Red

The Nifty was just waiting for a negative trigger to fall. The Nifty opened about 60 points in the green and then throughout the day kept falling. What was the negative trigger early in the morning? Probably none. It did try to recover at about 11AM but did not succeed. Later in the afternoon European markets also opened weak and then our markets could not recover though it staged a recovery of about 30-40 points before closing. In spite of that recovery the Nifty closed 43 points in the red while the Sensex closed with a loss of 165 points.

Attached above is the daily chart of Nifty with two downward sloping trendlines, a rectangle between 3800 and 4200 and the RSI. The Nifty found resistance exactly at the second trendline (the one on top) as marked on the chart. That was where the resistance was expected. The Relative Strength Index (RSI) as marked in the brown circle shows that the RSI turned from a level of 60. This is not bullish for the markets. It also shows that we may not be completely out of the woods. According to me, the levels of the RSI give a very good indication about the markets. I feel markets are bullish when RSI goes above 60 and bearish below 40 and sideways between 40 and 60.

Okay, a pullback is coming. Where is this pullback going to stop? When do I buy? Frankly, we do not know where the pullback will end. The markets shall decide that. We shall follow the markets and will position ourselves to buy when the pullback is over. We can try and analyse where the support levels are. The first support is near 4310, the second one is the top of the rectangle, i.e. 4200, the third at 4000 and finally at 3800. We don’t know where it will find support but we shall buy when the market rises for two days in a row but only if the low of the pullback is above the previous low of 3800. Keep reading this space everyday and we shall know when the pullback is over and what is the most opportune time to buy.

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Nifty May Fall to 3500, Started Looking Attractive

The Nifty opened today and started going up but like most of the days these days, the excitement lasted only about an hour or so before it started slipping down again. It made a low at about 3840 and started some recovery but soon after the European markets opened it started coming down again. The European markets were weak and at one point the FTSE was about a hundred points down but recovery in the late afternoon session (in Europe – by which time India had already closed) took all European markets well in the green (about a percent up) except FTSE which closed 21 points in the red. News on the international front is good today. Dow is trading 200 points up at the moment while the crude is trading below $135 a barrel. The American markets increased after results from Wells Fargo, a huge mortgage underwriter and servicer, which according to Bloomberg, came out with “better than expected” results after their profits declined by 23% and EPS was 53 cents a share against expectations of a 50 cents EPS. This was enough to make Wells Fargo jump 24% in a day. Compare this with Infosys results and the price movements, and we know how negative the sentiment in India is.

Seen above is the monthly chart of Nifty for the last decade. The indicators along with the price chart are the Stochastics oscillator (in green) and the Relative Strength Index (RSI) at the bottom. Never before in the history of the Nifty was the Stochastics down to these levels. Today was the all time low of the Stochastics indicator (5,3,3) in the last 16 years. As far as the RSI is concerned, it is only on one occasion in the last 16 years that it has went down below 40 (in September 2001) otherwise it has always found support at 40. Today the RSI was 44.43 and hopefully, this time too it may reverse from 40 (we assume such a long trend to continue until it is broken). The price chart shows a little more downside because the long term trendline drawn from the 2003 lows shows that there is support near 3500, which is in line with the target that we had calculated in yesterday’s post. Both the RSI and Stochastics show that the bottom may not be very far away.

Fundamentally too, the things are not looking too bad. According to the NSE website, the Nifty today closed with a Price to Earnings Ratio (P/E) of 16.33. At the same rate, assuming the price does fall to 3500, the P/E of the Nifty too would fall to 14.97 at current year earnings. Going forward, assuming that the earnings would grow at only 7% (the same as the GDP growth) per annum, the Nifty would then be available at only 13.99 times FY09E and 13.08 times FY10E. Today, it is available at 15.26 times FY09E and 14.26 times FY10E. Even during the Sep 2001 lows (after the Twin Towers crash) the Nifty was trading at a P/E of between 12 and 13 times earnings. Considering that the economic conditions may be better 6 to 12 months down the line, don’t these P/E levels of 15 to 16 times seem attractive? To me, they do.

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This Rally May Fizzle Out

The Nifty had a good day on Friday too. With a fabulous 200 point increase in Nifty on Wednesday and all its gains being washed away on Thursday, Friday turned out to be a good balm for the wounds of Nifty. A 90 point increase in the Nifty came at a good time but the move up was gradual and interrupted by regular corrections during the day. Inflation was a major worry and with inflation moving up to 11.63%, the market started coming down but not for long. The next move up took it past the earlier highs of the day but then it went into a 40 point range between 3980 and 4020.

Seen above is the 30 minutes chart of the Nifty along with the Directional Movement ADX indicator on top (green colour with red horizontal lines) and the Relative Strength Index (RSI) at the bottom (red colour with blue horizontal lines). The ADX indicator, as mentioned in yesterday’s post, measures the strength of a trend while the RSI measures the strength of a stock/index with respect to its historical prices. As seen from the chart, and as marked by the green arrows, every successive low in the Nifty saw a reduction in the strength of the trend, as measured by the ADX. Now the ADX is at a level of 15 and below 20 it does indicate that there is no trend in the market except sideways. This gives us an indication that the downtrend may have been over.

So, are we in an uptrend now? Not yet. As mentioned in a previous post, a short term uptrend shall be confirmed only if the Nifty were to go above 4105. We would get an early indication that the trend has changed if the Nifty were to go above the downward sloping trendline. The RSI finding support near 40, as marked by the green circle, also gave us positive indications about a forthcoming uptrend. Unfortunately, things change fast where the markets are concerned. With a 90 points increase in the markets, anybody would say that a short term uptrend will come about. However, the charts suggest differently. The move, as already mentioned, was slow and lacked momentum and, though the prices managed to cross the trendline, there was no excitement/large range candle associated with the breakout, which gives me doubts whether the breakout was genuine or not. The RSI finding resistance near 60, as marked by the brown circle, and failing to go above it also makes one wonder whether an uptrend will come now or after another brief correction.

At this moment, I’m afraid, this increase in prices may fizzle out once again. We may see another fallback to the lower trendline to 3920 or upto the previous lows below 3850 (or even lower??) before we make another attempt at a pullback. A move below 3875 will signify that we are back in a downtrend.

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Bloodbath on the Streets! 4500 Visible

It was a bad day for the markets today. The Nifty opened flat today and tried on three occasions to go above 4900 but could not sustain itself at those high levels. And by 11:40, it was clear that the Nifty would come down. But what ensued was not what had been anticipated by day traders. The Nifty dropped almost 180 points from the highs of the day. By the end of it all, everything was looking red, the screen was red, the charts showed all red and there was ‘blood on the street’, again red.

However, it wasn’t such a bad day for technical analysts. The swing traders had already anticipated a fall when the Nifty went below 4990. All stop losses for long positions were hit and they were, and still are, merrily sitting on cash, anticipating further downfall. While they do have a target in mind (in my case, it is between 4500 and 4550, and some are even anticipating 3800), they will buy only when the Nifty gives a signal to buy. It may mean missing out on a small portion of the decline/rally but it captures most of the move. There are different theories in technical analysis – one which tells analysts to execute their trades when the target is achieved and another which tells us to buy or sell only when a buy/sell signal is received. I like to follow both theories. For example, in this case, I would look to invest 50% of my money when the target is achieved i.e. when the Nifty goes below 4550 and I would invest the remaining 50% when a buy signal is received, even if it comes at 4800. Both methods have their own pros and cons and I will, probably, talk about them in one of my weekend posts which come under the ‘Lessons on Investing’ category. You can click on “Lessons on Investing” anytime in the label cloud on the right to read such posts.

We have the daily chart of the Nifty with us today. I’ve not included many things on the charts today, so as to keep it very simple for the readers. I am now going to explain what I have included, what my reading is about the chart and why I feel so. I always like to give reasons for my analysis and it is there for everybody to see. As you can see from the chart, there are two trendlines – a downward sloping dashed trendline and an upward sloping solid trendline. The solid trendline shows where the Nifty broke through the support line and showed that a downtrend could start. And the dashed trendline shows the level above which the Nifty should come back in an uptrend. As one can see, and as has been mentioned, a downtrend was signaled when the Nifty came below 4990 and an uptrend would be signaled when the Nifty crosses the dashed trendline which today stands at 5020. Since this line is sloping downwards, this level would keep changing everyday.

The next thing that can be seen from the chart are the two vertical dashed lines marked ‘A’ and ‘B’. Line A measures the distance from the top of the recent uptrend to the trendline on that day. This line A has then been superimposed at the point where the Nifty broke through the trendline and this superimposed line is marked as B. The logic is that the downtrend should be as brief (or as severe) as the uptrend was, though, in some cases there is a possibility of it getting extended too. This superimposed line, thus, gives us a target of 4530 on the Nifty. Since this target is usually not exact, I’m taking it as between 4500 and 4550. You will notice that the same principle is used when calculating the targets for head and shoulders patterns, double/triple tops/bottoms. If you look at the pattern formed from where the solid line starts to where it ends, it does look like a head and shoulders pattern, though, with a very slanted neckline. You will also notice that the Relative Strength Index (RSI) has made a much easier to imagine bearish head and shoulders pattern. Also, one should notice the RSI within the small circle. Since the last week, the RSI was repeatedly finding support at 40, which in itself is not a bullish sign, but is definitely a positive sign which suggests that the market was showing some strength because of which the RSI was finding difficulty going below 40. This strength has been negated today with the RSI advancing to levels lower than 40.

Again, we are not looking at charts of any stocks these days because it is not the time to buy as we are still in an intermediate term downtrend. When the market again shows signs of improvement and there are some buying opportunities available, some of them worth a mention would find their way through on this page.

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Short Term Technical Rally/Bounce Back Possible

The Nifty, boosted by strong Asian cues, opened in the positive today and stayed so for the first half of the day. It was probably the weak European markets, though they have also recovered by now, on opening that triggered the fall in our markets. And the fall was strong enough to bring the Nifty down by 80-85 points from its highs, thus giving us the fourth consecutive day in the red.

Seen above is the 60 minutes chart of the Nifty. While, the downtrend is clearly visible with lower highs and lower lows in place, yet there are some short-term positives visible on this short term chart. First of all, the price has now reached the downward sloping trendline which has provided support to the prices 3-4 times since the last one month. Not only that, it also reversed from the line and has shown one blue candle at the end. If we concentrate on the price movements in the last two days, 26th and 27th, we can see that the price has been making lower lows while the Relative Strength Index (RSI) during the same period has been making higher lows, thus creating a positive divergence between the price and the RSI. The same has been emphasized with the downward and upward sloping arrows. Another positive which is not visible on this chart, but is there on the daily charts, is that the RSI has found support at 40 and has flattened at that level.

An upward move could find resistance near 4900 and above that it could go on upwards to 4935 which will confirm a short term uptrend. This uptrend could take the Nifty between 4990 and 5010. A move to these levels could be used as a shorting opportunity. I think taking naked short positions is a risky game which risk averse traders should not enter into, but low risk shorting opportunities like buying puts (one could go for 4800, 4700 or 4600 June puts) or bear call spreads (e.g. buying 5000 call and selling 4600 or 4500 June call) is definitely a good opportunity. For reference sake, the 4800, 4700 and 4600 puts were available for Rs.156, Rs.118 and Rs.88 respectively at the end of the day while the 5000, 4600 and 4500 calls were available for Rs.93, Rs.320 and Rs.395 respectively.

Once again, do not be tempted to take long positions if the market does go up tomorrow. It makes sense to create long positions only if 5070-5080 levels are broken on the upside.

Uma, a small time trader herself, writes about her trading experiences in the form of a personal stock diary on her blog and it happens to be a good read. Incidentally, she also left a link to my blog on her blog. Thank you, Uma.

Well, that’s all for today.

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