Capitulation and Selling Climax Go Hand in Hand

The Nifty today opened flat with no global cues to follow but soon the strong downward momentum started pushing the Nifty down. It did attempt some sort of recovery in the late afternoon session, but failed miserably and closed after making a new low for the day. Today’s close was also the lowest close since 24th August 2007. It finally closed the day at 4191 while the low of the day today was 4156.10, which was again close to the 4157 support that we had mentioned in Sunday’s post.

The market is falling with so much of momentum that all supports are being wiped out. Such kinds of fall ultimately lead to panic like situations and then capitulation. But in such situations it is difficult to predict where the bottom would be. Seen above is the 60 minutes chart of the Nifty. This chart shows the 5 wave pattern that the corrective wave C of the Nifty has been following as has been mentioned in the posts dated June 18, 2008 and June 3, 2008. One of the concepts of Elliott Waves, which was not mentioned in any of the previous posts is that you can find out the wave 3, wave 4 and wave 5 approximate targets if wave 1 and wave 2 have been formed. Now to find out the wave 5 target here, we connect the end of wave 2 and end of wave 4 with a trendline. We then draw a trendline parallel to this line which passes through the end of wave 3. This line should give the approximate target of wave 5. As one can see, the target given by this line is near 4130 and a low of 4156 was already made today. It is possible that the target is achieved early in the morning tomorrow. It is also quite possible that with the strong downward momentum this target is overshot. Only time will tell where the market will stop.

But there is another short term positive visible and that is a bullish divergence between the price and the RSI as has been marked within the circles. The price has gone on to make newer lows while the RSI is still above its previous low. This suggests that even though the price is on the way down, the internal strength in the Nifty is actually increasing which suggests that an end to this downtrend may be near.

But then I just heard the news that the RBI has increased the CRR and repo rates by 50 basis points each. While the repo rate has been increased immediately, the CRR hike is to be implemented in two steps of 25 basis points each. Our newsletter, and many other market participants, were already expecting a rate hike, as was mentioned in yesterday’s post. A story on expressindia says that a meeting tomorrow between the Left and the Government will decide the fate of the nuclear deal and the government. The Left has made it pretty clear that if the Government decides to go ahead with the deal, it will withdraw support. The UPA allies are of the opinion that with inflation at a 13 year high, chances of a re-election in the event of snap polls are bleak and are pressurizing the government to delay the deal. However, there is strong speculation that the Prime Minister, Dr. Manmohan Singh, who has invested a lot of personal reputation in this deal, is unlikely to abandon the deal and may resign in case an agreement is not reached. If this happens, it may well mean that we are looking at a capitulation happening very soon, maybe as soon as tomorrow.

Uma, in her blog post regarding volumes, rightly says that One of the key signs of a market that's bottoming out, is low volumes. But, the huge volumes being traded on NSE show no signs of going down. What she says is perfectly right, except in cases of a selling climax, which usually accompanies capitulation. A selling climax happens when there is a big price fall along with a huge volume expansion. The result is that there are no sellers left post-climax. The aftermath is light volumes and flat prices. This article by Devangshu Datta, a technical analyst, very well explains all about a selling climax.

In my opinion, we are going to see a selling climax and a capitulation tomorrow or the day after. The consequent behaviour of the post-capitulation markets will be, as expected, light volumes and flat prices. But we would have to go through that pain if we want the markets to improve and recover and cross their earlier highs. It may be a very difficult task because a drop of 35% from there has brought us here but to reach the same level we need a rise of 55% and not 35%. But with strong fundamentals and God’s grace even that might be possible. Who knows?

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Capitulation? Not yet!!!

The Indian Government, two weeks ago increased the price of petrol by Rs.5/- per litre, diesel by Rs.3/- per litre and the price of domestic LPG by Rs.50/- per cylinder. This was bound to set inflation on fire, which it did as was shown by the inflation figures zooming past 11% for the week ended 7th June 2008. Not to say, that this price hike was not needed. In fact, it was very badly needed and much earlier than when it was finally announced.

Back in 1974, India was a very poor country and when the price of crude virtually doubled overnight, India could afford no subsidies to its citizens and they had to bear the brunt of the price increase. The same happened in the US in 1979 when they abolished all subsidies and the full price of crude was passed down to the consumers, which eventually led to the demand going down. Today, India is a much richer country but none the wiser. It can afford all these subsidies which is why the price passed down to consumers is only about $60 a barrel as against the $135 a barrel ruling in international markets. This heavy subsidy artificially keeps the demand high and hence the prices. The moment the full price is passed down to consumers, the demand will go down which should bring the prices down. So, in effect, by subsidizing crude prices we are artificially keeping the demand high and hence the prices are not coming down. So, while it is increasing the subsidy burden on our government, all that money is actually going to the OPEC countries. This is very well explained by Mr. Swaminathan S Anklesaria Aiyar in a column titled Swaminomics on the Times of India. This article also got me thinking on what am I doing in India? I should instead have been in Venezuela where petrol costs only Rs.2/- a litre. Paradise. Absolute paradise.

The Nifty continued its southward journey today, but did find support between the 4230 and 4240 levels on two occasions during the day. This was very much in line with our expectations in yesterday’s post where we had expected 4234 as one of the levels where the Nifty could find support. One of the supports was also placed at 4157. So, could the Nifty go down to that level or is 4234 the final low? The answer is, we don’t know. The markets would have to capitulate first to indicate that a reversal is possible. Capitulation happens when most of the investors lose their confidence in the markets and close their positions. Capitulation results in a panic like situation where the prices shave off quite a lot and quite fast. What happened in late January 2008 was a capitulation like situation when the markets lost about 30% from its highs in just 10 trading days. A similar situation is happening now when the markets have lost almost 10% in the last 4 trading sessions. But I don’t think a capitulation has happened yet.

With the inflation going past 11% and the repo rate being only 8%, all our investments in fixed deposits are now earning negative returns. This imbalance in the bank rates and the inflation cannot be maintained for long. The RBI shall have to intervene and increase the rates by at least a 100 basis points (could be in 2-3 steps rather than in one go) and such measures would have to be taken much before the scheduled credit policy meeting due on July 29, 2008. The market has already started discounting rate hikes into the prices but a strong reaction, albeit short, will be expected when the rates are actually hiked. Probably that will be the day of capitulation.

The 17 MPs (Members of Parliament) of BSP (Bahujan Samaj Party) have already withdrawn support from the UPA (United Progressive Alliance) Government on fears of the Government’s increasing proximity to the JD (Janata Dal) and the SP (Samajwadi Party). The Government is taking all steps possible to go through with the nuclear deal without forcing the Left Front to take drastic action. I wonder if they would be able to pull it off. The Prime Minister, Mr. Manmohan Singh, is already looking for reasons to resign. While the present government falling can only benefit the country, I doubt the market will take it that positively. Probably that will be the day of capitulation.

Nobody knows when that day of capitulation will come or how far down will the markets go or how much pain is still left. But one thing is for sure, the day the capitulation comes, we shall know. Such days are usually accompanied with huge and steep declines and extreme panic. The panic will build a lot of fear in everybody’s minds. But believe me, only the courageous few who decide to buy on such a day will end up as winners. Others shall see the opportunity come and then see it go. It is important to set aside your emotions of panic and fear on such a day and be as greedy as you can. As Warren Buffett says, "Be greedy when others are fearful and be fearful when others are greedy".

I leave you today with two charts, the top being the daily chart of the Nifty while the one at the bottom being the weekly chart. Both are giving contradictory views and my views are pasted on the charts itself. The market may follow one of the views. It is also possible that it follows one view for a short period of time (2-3 days to a week) and then follow the other view. What it finally decides to do, only time will tell.

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Fibonacci Time Zones on Nifty

I’ve written a number of posts about the Fibonacci Series and the importance of Fibonacci numbers in the stock markets including a webinar on the Fibonacci sequence. A few of such posts have been listed near the end of this post.

The Fibonacci Series was given by an Italian Mathematician by the name of Leonardo of Pisa (1170-1250AD), who was also known as Leonardo Pisano, Leonardo Bonacci, Leonardo Fibonacci or simply Fibonacci. A very interesting story is attached to why he was called Fibonacci. Leonardo’s father Guglielmo was nicknamed Bonaccio (meaning ‘good-natured’ or ‘simple’) by his friends and Leonardo was called filius bonacci (which means son of Bonaccio) which was later nicknamed Fibonacci.

The Fibonacci Series is a series of numbers which starts from 0 and 1 and each of the succeeding numbers in the series is derived by adding the previous two numbers in the series. So it goes as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 and so on. Each number is 1.618 times its previous number, 2.618 times the number before that and 4.236 times the number before that. Similarly, each number is 0.618 times its next number, 0.382 times the number after that and 0.236 times the number after that.

Fibonacci is present everywhere in nature and this video very well describes it. Needless to say, even the stock markets rely heavily on it. Elliott Wave Principle says that markets move in a direction in a series of 8 waves out of which 5 waves are in the direction of the trend and 3 move counter to the trend. Interestingly, all three numbers 3, 5 and 8 are Fibonacci numbers. It is a known principle that when markets retrace a particular move, they generally find support/resistance at Fibonacci ratios which is why the ratios 23.6%, 38.2%, 61.8%, 161.8%, 261.8% and 423.6% hold a lot of importance. A lot of material can be found on various Fibonacci techniques used in the stock markets such as the Fibonacci retracements, Fibonacci Arcs, Fibonacci Fan Lines etc. However, I am concentrating today’s discussion on the Fibonacci Time Zones. According to the Investopedia, the Fibonacci numbers play an important role in determining relative areas where the prices of financial assets experience large price moves or change direction. There are various examples which show that markets show a high range candle or change direction on the 3rd day, 5th day, 8th day, 13th day, 21st day, 34th day, 55th day and so on. Today’s discussion, however, won’t delve into high range candles but will only concentrate on change of direction.

Before I go deeper into the subject, I would very quickly like to emphasize how the Fibonacci numbers affect the markets naturally. A week consists of 5 trading days (a Fibonacci number), a month consists of 21 or 22 trading days (21, again being a Fibonacci number) and a year consists of 245-250 trading days (being very close to the 233 Fibonacci number). Interestingly, a year has 52 weeks (very close to the 55 Fibonacci number) and 8 weeks consist of 56 days (close to the 55 Fibonacci) and 8 months consist of 240 days which again is quite close to the 233 Fibonacci mark. So, Fibonacci occurs naturally. Nobody had any real intention of making the markets respond to Fibonacci numbers but they naturally do.

I have the weekly chart of the Nifty above, and on it I have drawn vertical lines where a significant market top or a market bottom was formed. Then I have calculated the distance between the top and the next or the previous bottoms and written the number of weeks taken to reach the next low/high. As can be seen from the numbers the market has been consistently making use of Fibonacci numbers like 3, 5, 8, 21 (on some occasions it has deviated to 20 or 22 also) and 34 (though, on one occasion it took 35 weeks) to turn around right from the low formed in May 2003 till Jan 2008. Another interesting thing to note is that the bull market that started in May 2003 and ended in Jan 2008 has taken a total of 55 months, 55 again being a Fibonacci number. Interestingly, the turnaround that happened in Jan 2008 and which has been continuing till now has now completed 24 weeks and is now in the 6th month which has decisively crossed the 21 number mark and the Fibonacci number 5. It means that the markets may not turn around till 34 weeks or 8 months are completed or if things do turn out to be very bad then maybe 55 weeks or 13 months. But we should be looking at the last week of August very carefully as a possible turnaround time because that is when the markets would have completed 34 weeks of a downtrend.

But what about the downside? How low can go the markets go? Let us make use of the Fibonacci retracements this time. The Nifty made significant lows of 599.51 in March 1993, 800 in Nov 1998 and 920 in April 2003 and a significant high of 6357.10 in January 2008 (I can’t help noticing that these are spaced more or less 5 years apart, 5 again being a Fibonacci number). Calculating the 38.2% retracement levels from these different lows to the same high of 6357, we get the support levels of 4280, 4234 and 4157. These are some of the levels where the markets should eventually find support.

I heard an analyst speaking on TV a few days back who was saying that after a long bull market a correction in price as well as time is required. He was saying that we may have seen two thirds or more of the price wise correction but have seen only a third of the pain. He said that in the weeks to come, the price may not fall too much but a lot of pain will be there, which is imminent if the markets were near the support and the bulls and the bears continue to fight near a particular level trying to decide what an appropriate bottom for the market is. Even after the bottom is formed, the pain will not be over since, then the market could go into a long period of consolidation and base building before a significant recovery in price is seen. If this were to be true, we may see a bottom being formed in the last week of August 2008 but a significant price increase (maybe a breakthrough above 4700 or maybe 5000) may not be seen for the rest of the year.

We have tried and have made an effort to analyse what the market may do but, ultimately, the markets have a mind of their own and can prove us wrong anytime. We have to be quick and humble enough to accept our mistakes and change our stance if the markets were to prove us wrong. On the other hand, if the market does move according to our wishes then we know the price levels and the approximate time where we can be more careful and decide whether the market has a mind of proving us right or not. As I said, technical analysis is all about the probability of profitability.

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4th Wave of Corrective Wave C Seems to have Ended

Finally, I’m back after a long break but can’t say for how long! I’ve had a pretty bad case of an infection which is just refusing to leave. After 4 days of antibiotics being injected into me, the high fever ranging between 103-104 degrees Fahrenheit seems to have relented. But I’ve also been having this real bad pain in the back (which, according to the doctors is related to the infection) which gives in only to painkillers and that too for only 4-5 hours. The bad part is that I can take the next doze of the painkiller only 8 hours after the previous doze and the last 3 hours are just unbearable. Today, I have taken the painkiller about 3 hours ago and I have about another hour or so to finish before I start getting the pains again. Hope I can finish what I have to say in that much time otherwise I’ll have to just upload it midway. So please excuse an abrupt ending to this edition, if there is any.

Seen above is the 30 minutes chart of the Nifty. As per the last analysis that I had done I had suggested that if the Nifty were to go above 4560, it could go on to find resistance at the 38.2% Fibonacci retracement level of 4675. It just so happened that the Nifty made a high of 4673.10 today before it changed its direction and started its move down.

Let us take a look at the daily chart of the Nifty and also look at the previous Elliott Wave Count analysis done on 3rd June, 2008. This analysis had talked about the Nifty being in the corrective wave C in which the waves A-B-C are following the 3-3-5 formation which means 3 waves each in waves A and B and 5 waves in wave C. The Nifty seems to be moving as per our analysis and now seems to have completed wave 4 and has probably started the fifth wave down of the corrective wave C today. The end of this wave shall signify the end of the bear trend. Considering this 5th wave to be as long as the first wave of this corrective wave C, we get a minimum target of 4295 and maximum of 3882 for the end of the 5th wave. Anything outside these levels would signify that our wave counting has gone awry. I, personally, am looking at a target in the vicinity of 4100.

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Down With Fever, No Analysis Today

Hi Everybody! As much as I wanted to write today but I just won't be able to do it. I am down with high fever and can't sit on the computer for long. My eyes are already sore and I'm sleepy too. Will try to be back with the weekend newsletter but just don't know how things will pan out over the weekend. All I can say about the markets tomorrow is, keep an eye on the inflation numbers at around noon tomorrow. It was 8.24% last week and is expected to cross 8.5% tomorrow. Any significant increase may put some downward pressure on the markets.

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Repo Rate Hiked, No Major Reaction Expected

The Nifty opened in the positive today and then had a few volatile sessions where the market was taken up, brought down, taken up again, brought down again and stayed in a range of 4490-4540 throughout the day. It finally closed the day at 4523, 73 points in the green.

Before I delve further into the newsletter, I must apologise for posting just the charts yesterday without much analysis and commentary. Actually, it was pretty late when I started last night and was already feeling sleepy when I started.

Today, I have the 30 minutes chart of the Nifty for you. A little bit of on-the-chart-analysis yesterday told you that there was some positive divergence visible between the price and the Relative Strength Index (RSI). A positive divergence, or a bullish divergence, occurs when the price is making a lower low or a lower high and an oscillator indicator (like RSI, MACD, Momentum, Rate of Change etc.) makes higher lows or higher highs during the same period. This positive divergence has been marked by the thick brown lines in the chart.

Another area on the chart marked by a brown double sided arrow is the gap created three days ago which still remains unfilled. One of the characteristics of a gap is that they are either filled very quickly or remain unfilled for a long time. This gap should have been filled by now. The reluctance of the price today to go into the gap territory is clearly visible on the chart. This may not be a very good sign for the markets. A double resistance is close by at 4560 which is the 23.6% Fibonacci retracement level and the green coloured downward sloping trendline.

In case the Nifty were to cross this resistance, it should go on to fill the gap and reach the 38.2% retracement level at 4675 or find resistance somewhere within the zone of resistance marked by the black rectangle between 4670 and 4720. The RBI has increased the repo rate by 25 basis points from 7.75% to 8%. A major part of the market was expecting some sort of intervention, following the petrol and diesel hike, by the RBI before their next credit policy which is due in July end. Since a major part of the market was expecting a hike, it may have an immediate knee jerk negative reaction on the markets but no major downside owing to the rate hike is expected. Of course, a major downside based on technical factors (like the gap not being filled or the previous low of 4370 being broken) cannot be ruled out. The best thing would be still to maintain a cautious view.

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Nifty Goes Sub-4400 Levels Intraday, Then Recovers

I had to go out in the evening somewhere and have just returned home and we are already closing in on midnight. While I have access to internet and charts at home, detailed analysis is likely to take time. So, will not go into any commentaries of any sort today. Will just throw in a couple of charts and leave a few comments on the charts itself.

Nifty Daily Chart

Nifty 30 minutes Chart

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