Small Downfall Still Expected

As expected, the Nifty did go down today. During the day the Nifty did try to go up but could not go above yesterday’s close. It did manage to reach there but turned down again to close near the lows of the day.

Today we have the 30 minutes chart of Nifty with us. In the last 3 days we have seen that the Nifty has remained within a very narrow range. It may be consolidating within the range. What will happen after the consolidation is over is anybody’s guess. It has support between 5000 and 5010 and resistance between 5070 and 5075. This gives us a total range of 75 points. Once the Nifty decides to move outside this range then it gives us a target of another 75 points in the direction of the breakout. Of course, these targets can easily be overshot too depending on the momentum.

Let us look at the pros and cons of this range. The pros first. The Nifty had gone up about 450 points in the current rally, on the daily charts, without any meaningful correction. A correction/consolidation is healthy for the market. We want the Nifty to consolidate and catch up its breath before it starts running again. We don’t want it to keep running, become breathless and then collapse. So in that regard this consolidation will be good for the market and the results will be known once the Nifty crosses 5080.

And the cons? The latest rally, which was today’s rally, failed to reach its earlier highs near 5070-5080 and that signifies that there is weakness in the markets at higher levels. Another interesting observation on the charts is that it has made a small bearish/inverted head and shoulders pattern within this range. This pattern, though, has not been confirmed yet. A break below 5000 will confirm this pattern. The target for this bearish head and shoulders pattern will be about 4940. At this point, there seem to be more negatives than positives in the short term.

There are a few charts which are giving buy signals and have been discussed below. But one’s own discretion is required because we are expecting the broader market to come down a little. Please note that some of these stocks may be available at a cheaper rate in a day or two but the buying signals remain valid till the stop loss level is hit.

Aditya Birla Nuvo is showing some signs of improvement, as can be seen from this daily chart. What looks positive for the stock is the support for the Relative Strength Index (RSI) near 40, as marked by the circle. A move above 1500, which may or may not come tomorrow, should be positive for this textiles stock. A stop loss of 1375 will be prudent while waiting for a target of close to 1700, where it will meet the resistance line.

Arvind Mills, on the daily charts, has broken through its resistance line accompanied by huge volumes. This is bullish for the stock. The RSI is close to 80 and it is generally advised to wait for a pullback before buying. But seeing the chart, we can see that Arvind Mills has closed near the highs of the day without showing any signs of a pullback. Under these circumstances, it can be bought at the current levels with a stop below 50 for a target of between 65 and 67.

Hindustan Constructions has been moving within a narrow range between 110 and 140 since the last month and a half. It is now near the top of the range and may break out of this range. If it does it gives us a target of close to 170. A stop loss below 125 may be safe. But this stock should be bought only if it were to go above 140. Ignore the movements in the first 30 minutes as they are subject to volatile movements more because of global cues than because of technical or fundamental reasons.

Another very interesting chart of Jindal Steel. As can be seen from the chart, the price has been making lower highs while the RSI has been making highs at almost the same level, if not higher. This is known as a bullish/positive divergence when the price is going down but the RSI is going up. Now it is close to its resistance near 2300 after a pattern which looks like a double bottom formation. Not only that the RSI which was finding resistance near the line has broken through it which gives an indication that maybe the price will follow. Buy only if it crosses above 2300 with a stop loss of 2100 for a target somewhere close to 2750.

Petronet LNG has been in a narrow range between 60 and 80 for a better part of this calendar year. It now seems to have broken out of the range, while the volumes, though increasing, remain significantly low. Not the kind of volumes one would expect to see with a breakout. So, one can take a risk using her own discretion to buy near current levels with a stop loss near 74 for a target of near 100.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the fall today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

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The Case of the Vanishing Strength

It was a mixed day for the Indian markets today. The markets opened on a weak note today and remained subdued for the next two to three hours. It was only at about 1pm when the markets turned in the positive but soon found resistance at higher levels and started coming down to close only 12 points in the green (Nifty) and 44 points up on BSE.

On the whole, it was a positive for the market that it recovered and closed in the green. What was not positive is the Relative Strength Index (RSI), which again failed to cross 60. It is marked by the blue circle in the chart above. The RSI, as the name suggests, measures the relative strength of the prices now with respect to its historical prices. Theoretically, RSI oscillates between 0 and 100 but 0 and 100 levels are rarely seen. RSI is considered to be oversold below 30 and overbought above 70. A lot of people prefer to say that RSI is bullish above 50 and bearish below it. I am one of the few who believes that RSI is bullish above 60 and bearish below 40. This is why I consider finding resistance at 60 a negative sign. All the strength visible on the charts now seems to be vanishing with the RSI not being able to cross 60.

There is another circle (green) marked on the RSI chart which shows that the RSI had found support at 40 in the beginning of the month. That was an early indication which showed that the prices could have broken out of the range. And that did happen. Today’s RSI is showing that the prices may fall soon, maybe as early as tomorrow. Today was the 6th consecutive close in the positive and it may show a red day soon enough. The last time we saw 6 consecutive up closes was in September 2007 (that time it was 11 consecutive up closes and that is actually quite a rarity). Such other occasions (6 or more than 6 up closes) were in Aug 2007 (8 closes), April 2007 (6 closes) and Nov-Dec 2006 (6 closes).

A downmove should find support between the 4900 and 5000 zone. However, if the Nifty were to fall below that there is a strong support at 4830 which should not be broken. A close below 4830 suggests bearishness. 4800 calls recommended in the beginning of the month could be sold off first thing in the morning. They are gaining about Rs.100/- per unit or Rs.5000/- per lot of Nifty (50 Nifties). No stocks are being recommended today since the market may come down tomorrow and things may be cheaper on Thursday/Friday.

Let’s take a brief look at the American markets. The Dow Jones Industrial Average (DJIA) was moving within a range between 11740 and 12740. Generally, too, there is a lot of resistance at 12740. A close above 12740 yesterday was bullish and that too with a gap. However, a problem with gap days is that the markets tend to close/fill the gap as soon as possible. If this were to happen as early as today then it would be considered a false breakout and we will come back into the range. A noticeable thing on this chart is that again the RSI has not been able to cross 60. But if this breakout is correct (we shall come to know in 2-3 days) then we have a target of about 13700 on the Dow. If that happens, our markets should also remain strong.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the markets today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

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The Wise Analysts

The Markets are in a habit of doing this. Yes, they do have a habit of making a fool out of analysts. I keep saying this regularly in my newsletter because that’s what the markets do. The business channel CNBC keeps asking analysts everyday about the future of the markets. You would realize, on careful examination, that when the markets are going up, 90% of the analysts are bullish and 10% may still be bearish. In this case, the converse is also true, that in bearish markets 90% analysts are bearish and only 10% bullish. And when the markets do take a turn you would realize that these analysts also change their stance as quickly. All laugh at them that what they had been predicting all along has gone horribly wrong. But ever realize why they change their stance so quickly? Because that is where wisdom lies. You must understand that “markets are supreme”.

You can’t fool the markets but the markets fool everybody. So, wisdom lies in the fact that you follow the market rather than to go against it. Buy when the markets are going up and sell when they are going down. That is the only way to make money. And what do all of us small investors do? Exactly the opposite. We buy a stock because it is looking good. And then the price starts coming down. What do we do? Keep holding on to our position in the hope that the markets will recover. Unfortunately, hope does not work in the stock markets. The wisest thing for us to do would be to admit that the market has made a fool out of us and our bullish ideas and the position should be closed with a small loss rather than to let the losses multiply and let the markets make us bigger fools. That’s what the analysts do. They realize that they have been fooled and they move with the market rather than to defy it.

This is exactly what happened with me. You know how bearish I was a couple of days ago. I now realize that I was also fooled by the market. And suddenly, two days later the situation has become totally different. The Nifty, which was finding it difficult to go to its upper end of the range, suddenly broke its downtrending line (drawn over 25 days on the 30 minutes chart) and has now reached the upper end of the channel. So, the wisest thing for me, and all of us, would be to forget that bearish mood and to get ready to enter the markets with a long position.

I have been maintaining that on the longer term charts the range between 4500 to 5500-5600 should hold for sometime and I continue to hold that view till the Nifty breaks one of these 2 levels. For tomorrow, resistance lies at 5560-5570 and support near 5390 and a larger support near 5130. A closing above 5570 could show the Nifty going up to its next target of 5970.

No charts analysed today.

Happy investing!!!

Simple Rules for Analysing Stock Charts

Some people have started becoming bullish now. Fundamental analysts have started saying that markets are fairly valued now and valuations have now reached at 2004 levels. But there are still many who continue to be bearish and say that the worst is still not yet over and there may be a retest of last week’s lows. I personally feel that after such a deep correction, the confidence of a lot of people has been shaken up and it will take time to build up that kind of confidence again. So we may just consolidate between 4500 and 5500 (Nifty) for sometime. The markets do go up now but with low volumes and there is a lot of selling coming in at higher levels. This is what happened yesterday. The markets did go up but with dry volumes. There was no strength in the move as far as the volumes are concerned. We can expect the volumes to increase once the crucial level between 5500-5600 is crossed.

Generally, those who have lost the confidence in the markets (because of the recent fall) do not enter at these levels. They keep waiting till the markets improve and till they feel that nothing could go wrong now. And then they enter. In fact that is the time to sell. The correct time to buy is now. Invest when the markets are beaten down, when the valuations are low and when there is panic in the markets. Be a contrarion to the general public. That is the way to make money.

My technical software is not working today and there are no charts to see and analyse and give my inputs for Monday. However, for all of you who want to learn to look at charts, I’ve consolidated a few simple rules which anybody could apply.

Though, you really do not need a charting software (there are so many charts available online) but you do need to study them. Apply a few simple rules and you are ready to go. But there will be some people who would like to buy a software and study everything in detail. Whenever you buy a charting software, it will come equipped with all the technical analysis tools and indicators. Many of you would have gone through some technical analysis books and would be raring to have a go at analyzing charts with one indicator, and another, and another and yet another.

Well, that is the first step to go the wrong way. The most important rule to remember while analyzing charts is that you have to keep them simple. Remember: “Too much of analysis leads to paralysis.” The best way to study charts is to apply only one or two rules/indicators or at the most three. My personal favorites are trendlines, RSI and MACD.

For those who just want to do it as fun and learn without any real investment in a software, here are a few simple rules you can apply.

Dow Theory: This theory was given by Mr. Charles Dow in 1931. He was the man who started it all. He used to say that stock prices move in trends and one should buy when the trend is up and sell when the trend is down. His definition of an uptrend was when the price made a higher low and then a higher high. Similarly, a lower high and a lower low signified the beginning of a downtrend. This theory can be applied to charts of all time frames.

Trendlines: Trendlines are those lines which connect at least 3 lows or at least three highs. An uptrending line should be drawn by connecting the lows and a downtrending line should connect the highs. The signal that one gets from trendlines is the breakthrough of prices. When prices penetrate an uptrend line, it is time to sell and when they go through a downtrend line, it is time to buy.

Moving Averages: Moving averages, in short, are moving trendlines. You simply calculate the average of the closing prices of the last x days (depends on what period you want to choose. Most common are 10, 21, 50, 100 and 200) and that is the value of the moving average for the last day. And you will be surprised to see how regularly prices find support/resistance at these levels.

For more indicators, it will become too complicated to calculate yourself and it would be best to buy a charting software and then we can probably hold a meeting/seminar and go into the details of analyzing charts. But one should remember that there is no such thing as a PERFECT INDICATOR. It does not exist. But it does not mean that indicators don’t work. All indicators are good and all indicators give very good signals. You just have to be consistent using them.

I hope this article was of some help to all of you. Do leave a comment in case you would like more such articles on a regular basis. Also leave a comment if you don’t like the article and would prefer not to be disturbed with such topics which don’t have any recommendations.

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More Downside Expected

Some new pages have been added into this site yesterday, which give good information and news about the Indian and the World markets. Please click on the tabs on the top to go to the other pages. For now, one would have to refresh the page at short intervals so that the most recent data is available in front of you but we are trying to incorporate a feature of automatic updation, which may take a couple of days. I need help of some tech savvy people who can help me to incorporate this feature. Those willing to help may please contact me.

Looking at the 30 minute chart of Nifty today, we find that we are in a short term downtrend now. We had another lower high and a lower low, as well. And in the process the Nifty broke through its short term trendline, had a small pullback and found resistance at the same trendline and turned down again. In the short term we have a small support near 5070 but as of now, there are no indications that it will hold. We have some resistance near 5300. As already mentioned, we are in an intermediate downtrend and will remain in one for some more time, or at least till the time 5500 is breached on the upperside. This level may change with time. Below 5070, we may be looking at a target of 4900.

It was the day of the Futures and Options expiry today. Tomorrow, and maybe Monday, there will be some build up of positions in the new month, which may be a cause for some volatility. After that the volatility may decrease and then only can we get a clearer picture of the direction of the Nifty. For short term traders, one should take only short positions and some of them have been identified here.

Air Deccan has a little support near 168. If this support breaks, it may come down to 140. Sell near 167 (stay away in the first 15 minutes of the morning) with a stop loss of 185 for a target of 140-142.

Allahabad Bank seems to have made a small head and shoulders pattern, which is bearish for this banking stock. Notice the sudden increase in volumes in the last half an hour when the stock broke through the neckline. Look to sell below 107 with a stop loss of 118 for a target of 96.

Bata India has also made a bearish pattern with a breakdown below the support at 167 with a sudden increase in volumes on breakout. This shoe company looks as a good selling opportunity below 160 with a stop loss at 180 for a target of 135.

IDBI is another shorting candidate after it completed its bearish head and shoulders pattern. With a stop loss above 118, it seems a good sell below 110 for a target of 96.

MTNL has also made a bearish pattern with a breakdown below the neckline at 119 with a sudden increase in volumes in the last half hour. This telephone company is a good shorting opportunity below 118 with a stop loss at 126 for a target of 103.

Network 18 also seems to have made a head and shoulders pattern with the head and the shoulders marked in the chart. With a stop loss of 350, it seems worth selling below 320 for a target of 285.

Under normal circumstances, whenever the price increases, the volumes also should increase, as has been happening in this 30 minutes chart of Reliance Natural Resources Limited (RNRL). This has been marked by the blue lines in the chart. But notice the price and volume pattern in this last increase and decrease (marked by the thick purple lines) where volumes fell when the price was increasing and volumes rose when the price was falling. This is a bearish sign and RNRL has also failed to reach its upper resistance of 150. One can profit from selling it below 130 with a stop loss of 143 for a target of 110.

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Markets Choppy Ahead of Bernanke Verdict

Nifty continues to move in a small range between 5150 and 5500. After such a deep correction, in which so many retail investors burnt their fingers and were thrown out of the market, this was only to be expected. We can expect a stock, or for that matter, an index to move up in a healthy way only if it consolidates after a deep correction. This is what is happening in the Nifty now. We expect it to continue with this base-building exercise till the time it either crosses 5500 on the upside or 4500 on the downside. Tomorrow is expected to be a very volatile day.

Not only is it the day of the F&O expiry, but also, we are expecting an interest rate cut by the US Fed Reserve Governor, Mr. Bernanke. While a 50 basis points cut is being largely expected by the market, yet the decision totally lies with Bernanke. The market, in general, should take the rate cut (if it comes) positively and expect some downside if there is no change in the interest rates.

As seen from the 30 minutes chart of Nifty above, the previous high made on 25th could not be crossed by the high made on 29th and the previous low made yesterday (29th) was broken today. But the low made yesterday was not a very significant low. If the Nifty were to go below 5071 then we would be back into a pattern of lower highs, lower lows and the short term trend will change to down. The intermediate term, as we have been mentioning since the last so many days is already down. But the long term trend remains up. So, any dip is a good time for investors to buy. Traders should take long positions only if the short term trend were to turn up, which means if the Nifty were to go above 5390.

Tomorrow is going to be a very volatile day. Though, day-traders do look for volatility to make money but in such volatile conditions, a wrong trade could cost a fortune. Tomorrow is a day when traders also should stay away from the markets.

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RBI Credit Policy Along Expected Lines

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

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

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

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

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

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

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

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

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

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

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