Short Term Uptrend Above 4105

Yesterday the Nifty had gone up almost 200 points but all those gains were washed away today at one point but finally in the mid afternoon session the Nifty did move up a little. In the end it closed 167 points down from yesterday’s close and only 29 points above Tuesday’s close. A total range of 259 points in 3 days but only 29 points up! Yesterday we had suggested that the Nifty, if it were to cross above its resistance line would go up but the Nifty decided to turn around from there rather than to go up.

Attached is the 30 minutes chart of the Nifty which shows the inability of the Nifty to cross its resistance line. According to the dictionary, a trend is defined as the general direction in which something tends to move. With the markets it sometimes becomes difficult to determine whether the prices are moving up or moving down. In the chart attached above one can see that in the last 10 days or so the trend is down since prices are moving down. But what about the last two days? Are we in an uptrend or in a downtrend? Has the trend changed to up? If not, when can we say that the trend has changed? Well, that is why we use trendlines. Trendlines are drawn by connecting two or more successive pivot highs in case of a downtrend and two or more successive pivot lows in case of an uptrend. When the prices breach the trendline, we say that the trend has reversed. But in some cases the trend continues in the same direction but only slows down a bit after crossing the trendline. Which is why we say that a confirmation of a reversal comes only when the price starts making higher highs and higher lows OR lower highs and lower lows, as the case may be.

In the chart above, as far as the trendlines are concerned we will come back into an uptrend if the Nifty were to go above 4040 and in a downtrend if it were to go below 3890. We can see that the Nifty has already made a higher low and as soon as a higher high is made, we will be back in an uptrend. A higher high would be made if the Nifty were to cross 4105, which has changed from 4325 since the most recent pivot high was formed yesterday at 4105. A downtrend would be confirmed if the Nifty were to go below today’s low of 3875, which happens to be the most recent pivot low. As to predicting what will happen, we shall let the market decide what it wants to do. But indications are positive. The Relative Strength Index (RSI) found support at 40 today and reversed from there which is a bullish sign. At the moment the Dow Jones Industrial Average (DJIA) is trading about 75 points higher, crude is trading at about $144, which is off its highs near $145.80. And if Asian markets remain good in the morning, we can expect a positive opening. The only thing that worries me for tomorrow is the inflation figures which will be made public at noon. I’m expecting inflation to increase to around 11.6%. Anything more than that should be negative for the markets.

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Expect More Bounce in the Short Term

The Nifty opened flat, went up in the first 15-20 minutes after opening but soon started coming down. The support at 3882/3878 was soon broken and it took the Nifty to make a new low at 3848 before it started moving up again. And what a rally it was! A 200 point rally in just 2 hours of trading (between 1PM and 3PM) ensued without any correction whatsoever. On the 5 minutes charts, there were only two candles during that period which had a low lower than the low of the previous candle. In the last 30 minutes the Nifty did display some resistance near 4100.

I have attached the 30 minutes chart of the Nifty today which shows the fantastic rally that took place today. There were no complaints from the rally today, except that it fell just short of confirming the uptrend. As we can see from the charts, the rally stopped exactly at the resistance line. Thankfully, the Relative Strength Index (RSI) has given an indication that the rally may go past the resistance line. It has done so by itself going above the line that was providing resistance to it. A confirmation using the trendline technique will come if the Nifty were to cross this resistance line. If we are using the Dow Theory then a short term uptrend would be confirmed only if it were to cross its most recent pivot high which lies at 4325 as shown by the dashed green line. But one should remember that would be confirmation of only a short term uptrend. An intermediate term uptrend would be confirmed only if the Nifty were to cross 4680.

But why did the market bounce back today? Why were we not expecting a bounce back? Well, the answer is that’s what happens in a capitulation. The capitulation day makes the market so negative that everybody is expecting it to go down. All investors are bearish, all analysts are bearish, all charts are bearish and there is a lot of pessimism around. Though, there are signals available that capitulation is coming, yet the market decides when it has capitulated completely. As mentioned in yesterday’s post, capitulation like symptoms were visible, but I personally feel the market hasn’t completely capitulated yet. Of course, that is my personal opinion and I could be wrong too. I support my reasoning with the logic that a capitulation is much sharper and lasts much longer than what was seen in the last 3-4 days.

The main reasons why the markets went up today, in my opinion, were mainly political and also valuation based. It seems certain now that the Samajwadi Party (SP) would provide support to the government on the nuclear deal issue in case of a Left pull-out. It also seems certain that the government would not fall even if the Left pulls out and that the nuclear deal might go through. While this rally is just discounting the positive developments, we should see a big rally when the nuclear deal goes through without the government falling. Looking at the valuations, Nifty, which was trading at a P/E (Price to Earnings Ratio) of over 28 in early January was down to 16.66 yesterday (based on current earnings – Forward P/E would be even lower). The Nifty Midcap 50 Index was even more attractive. The P/E which was close to 25 in January was down to only 10.15 yesterday. And a P/E of 10-15 times is a very good level to pick up stocks. But fundamentally speaking, high crude prices and inflation still remain areas of concern.

So, what do we do? Is it a bear market rally or the beginning of a bull market? We don’t know for sure right now and the best thing to do would be to follow the market and wait for it to tell us what to do. We should go long in the short term if a short term uptrend is confirmed (with proper stop losses, of course). More positions for a longer term can then be added when an intermediate term uptrend is also confirmed. In case the market comes down without confirming an intermediate term uptrend, we would know that it was just a bear market rally.

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Capitulation Like Symptoms Visible

The Nifty yet again opened around the same levels as yesterday’s closing and started moving up. Yet again, at 11AM, it started coming down, and exactly like yesterday found support in the late afternoon session. But today the support was found 160 points below yesterday’s close of 4040 at 3878. The Nifty finally ended the day 144 points down at 3896. Our level of 3882 mentioned in yesterday’s post held very well today.

In the last few days I have been discussing Elliott Wave Counts on the Nifty and so far the counts appeared to be correct and working as per our expectations. To read what we had written in other posts discussing Elliott waves, one can go to the end of this post and under the section “Other Posts That May Interest You” read the posts listed under ‘Elliott Waves’. Or, simply click here to read all posts which have discussed Elliott Waves. Briefly, I had mentioned that we are, probably, in the 5th wave down of major corrective wave C. While writing yesterday’s post I got confused and had mentioned that wave 5 cannot be longer than 797.60 points which was the length of the 3rd wave down in the corrective wave C. As per the Elliott Wave principles, the 3rd wave is usually the longest but NEVER the shortest. And I got confused into thinking that if the length of the 5th wave is more than 797.60 then the 3rd wave would become the shortest. What I forgot was that even if wave 5 was longer than that, wave 1 would still be the shortest which measured only 385.05 points. And Sanjay rightly pointed out in the comments here that even if wave 5 exceeded 797.60 points, wave 3 would still not be the shortest. Thank you, Sanjay. Usually, if the 3rd wave is the longest, wave 5 is almost equal to wave 1. In some cases, it could even be 1.618 times, 2.618 times or 4.236 times of wave 1 (and in some of these cases wave 5 could then become the longest). This seems to be a case where wave 5 will be the longest. 1.618 times of 385.05 would be 623 points and the 5th wave is already longer than that. The next target for the end of wave 5 would be 2.618 times of wave 1 (385.05 points) which is 1008.05 points which works out to a target of 3671.70. God save us if it extends to 4.236 times of the first wave!

I have the daily chart of Nifty uploaded today, as seen above. This chart is the same as yesterday, except being updated with today’s candle. As can be seen from the Bollinger Bands, today’s close was outside the limit of the lower band and this means that the downtrend would continue. Our analysis of the Elliott Wave Counts already suggests that we are looking at a target close to 3672. A quick run through the charts of various large caps and mid caps tells me that almost all stocks, with the exception of those in the pharma and IT sector, seem to have broken through their major supports on the downside. A little bit of capitulation like symptoms were visible today with the prices falling drastically with high volumes. However, there were rumours that an American hedge fund was selling and that the retail investors were not capitulating.

Udayan Mukherjee, the senior stocks analyst for CNBC TV18 said today, that the holdings of the retail segment are mostly in the mid cap and small cap segment and only a small quantity of the retail investors would be invested in the large caps. So, if at all a capitulation by the retail investors were to be seen, it would be mostly in the mid cap and small cap segment and very little in the large cap segment. I, somehow, tend to agree with him. I took a look at the chart of the CNX Midcap 200 Index also today and the picture looks grim, to say the least.

Attached above is the chart of the CNX Midcap 200 Index. The Midcap Index fell by 426 points today, or 7.8% to close at 4992. A look at the chart above tells us that the Midcap Index has confirmed a bearish head and shoulders pattern below 5850, which was formed over a period of 12-14 months. The target for this pattern is close to 1700. If this Index does fall to 1700, it would have fallen 82.6% from its all time high. Incidentally, a smaller bearish head and shoulders pattern is visible on the Relative Strength Index (RSI) chart too. A fall of 82% would really be called capitulation. Please do not interpret my words to say that the midcap Index will fall to 1700. What I said was that it has a target of 1700. The market/this index may capitulate much before it reaches that level.

One very important thing to be noticed and kept in mind is the sentiment indicator. All analysts on TV, Radio and the newspapers are now extremely bearish about the markets. More and more analysts have started giving targets below 10000 on the Sensex. The media (both visual and print), besides business newspapers and business news channels, have started reporting about the massive fall in the markets and the amount of money that the investors have lost. Even knowledgeable people like mutual fund managers and FIIs have turned negative and have started selling. There is pessimism all around. All these factors indicate that we are somewhere very close to a bottom. Long term investments could now be made in small quantities (I’m not saying this as a technical analyst but only as a contrarion investor). Maybe this should cheer some of you out there in all this pessimism.

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Below 4000, More Downside Possible

Surprisingly, the markets did not open with a negative bias today and in fact started gaining ground in the beginning of the day. But the good times didn’t last long, in fact, not even a full hour and by 11AM, the markets began their southward journey, and finally found a little bit of support near 4020 at 3PM which held till the closing bell. The break of the support at 4093 (most recent pivot low) was a big negative for the Nifty. The Nifty eventually closed at 4040.55, which happens to be the lowest close since 20th April 2007.

This also means that our Elliott Wave counts of 1,2,3,4,5 of corrective wave C, as mentioned in one of the previous posts has gone wrong. It also means that the fifth wave has not ended as yet. This means that the fifth wave is also an extended wave. We don’t know how long it will be. What we know is that it cannot be longer than the third wave. The third wave started at 5167.40 on May 16, 2008 and ended at 4369.80 (assuming that to be the end of wave 3) on June 10, 2008, thus measuring 797.60 points. The fifth wave started on June 18, 2008 at 4679.75. This means that the wave five cannot go below 3882.15 in any case. If it does then it means that our wave counting is wrong again and that we may still be in wave 3 of major corrective wave C.

For tomorrow we have support between 3970 and 4000, as was seen in the chart shown yesterday. According to the Elliott Wave Counts (assuming them to be correct), we do not expect the final low for the Nifty below 3882.15. So, we may be looking at support between 3882 and 4000. Shown above is the daily chart of Nifty with Elliott Wave Counts and with the Bollinger Bands. The close of the Nifty today was below the lower band, and as mentioned in an earlier post, it means that if the close does not come back within the band tomorrow then we may be looking at more downside. It effectively means that if it breaks 4000 tomorrow then we may be looking at a target near 3882.

The political situation also worsened (or improved??) today. The Prime Minister has decided to go and attend the G8 summit. The Left has taken it as a signal that the Government has decided to go ahead with the nuclear deal and reiterated, once again, that it would withdraw support if it did so. To make matters worse, the Prime Minister said that “there has been nothing new with the Left’s stand”. The political analysts view his confidence as a confirmation that the Government is confident of getting the support of the Samajwadi Party (SP) in case the Left withdraws support. With the UPA tally at 225 and adding 39 as the SP support the UPA still falls 8 short of the magic number of 272 to get a majority. However, getting the support of 8 more may not be too difficult a problem for the government. In case it does get the support, it would mean that the nuclear deal would go through and the government also will not fall. With the Left out of the way, the Government actually may be able to take some positive decisions (not saying that it has too much of time to do that since elections are due in May next year). That would be an ideal situation for the markets to begin a new bull market.

But inflation would still remain a concern and the market may probably be looking at a stabilization in the inflation rates before starting to go up again. With the world commodity prices still increasing and crude on the rise again, and the effect of the petrol price hike last month trickling down to other industries, the inflation figures are likely to become worse at least for another month or two, before stabilizing.

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Weak Opening on Nifty Likely

After two days of impressive gains, the Nifty fell flat on its face on Friday to reach near the earlier lows near 4100. It was mainly because of highly negative global cues. The Dow Jones and Nasdaq were both heavily down. The European markets were down and so were the Asian markets on Friday. On account of global cues, Friday wasn’t a good day either, with the Dow Jones falling more than a hundred points and the European markets also closing about half a percent down except the FTSE 100 which kept trading with a negative bias throughout the day but closed just a touch in the green. This makes us realize that if Asian makets are no better on Monday then we are looking at another weak opening which will push us below the previous lows, which lies only 43 points below Friday’s closing value of the Nifty.

When there is no sense of optimism left in the markets, it makes predicting the lows very difficult. This is the most difficult times of the markets. Optimism is just not present near the end of the bear markets and in the beginning of bull markets. Every rise is seen with skepticism and supports break relentlessly. Maybe our prediction of spending 34 weeks (or 55 weeks) in the bear market is coming out to be correct.

A screenshot of what I had written then is given above. When there is no optimism present, we don’t know which support is strong enough to hold and which weak enough to break. We can’t predict the lows but we can look for supports.

I leave you today with the weekly chart of Nifty with some possible support lines drawn on the chart. The nearest ones have been drawn as thick green lines while the lower supports have been drawn as thin ones. It can be clearly seen that there are two supports near 4000, one near 3500 and another near 3100. It is also expected that 4000 being a round number will provide some psychological support too.

I just used a sentence in the previous paragraph that optimism is just not present near the end of the bear markets and in the beginning of bull markets. Does that mean that we are near the end of the bear market? Well, nothing can be said as of now. We may be near the end or we may be just 6 months into a long 2 to 2 and a half year bear market. All I can say, at the moment, is that while optimism is absent these days, bear markets always tend to finish with a lot of panic and a capitulation. Incidentally, that too has been absent right now. But, at present, the 4100 level is of a lot of importance. With weak global cues, 4100 may be broken tomorrow. But if it remains below 4100 for an extended period of time (about 2-3 hours into the opening) then we may be looking at more downside. With no optimism present, it is needless to say that one should refrain from taking any long positions in the short or medium term. While it does not make sense to take long term plus positions also, I feel that over a longer term period, timing the market is not of much importance. Fundamentally good stocks will never give you a loss if you hold them over a long term horizon. For long term investors any time is the right time.

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Birth of a New Bull Market?

The resignation didn’t come today. Maybe it will come a few days later. Speculation is ripe that in a week’s time the UPA will meet the Left and inform them (rather than reaching a decision) that they are going to the IAEA (International Atomic Energy Agency) to get an approval on the safeguards text. The Left has categorically stated that it ‘will not allow them to go to the IAEA’. And the moment the Government goes, support would be withdrawn. The Government may not be able to garner enough votes to save itself in the event of a no-confidence motion.

I have pasted above the 30 minutes chart of the Nifty. Formed over the last four days can be seen a small bullish head and shoulders formation on the Nifty. This pattern has been confirmed in the last 30 minutes. I, probably, would have expected a larger range candle in the last 30 minutes to accompany a breakout, but with profit booking possible in the last 30 minutes, a concession could be given. The target for this head and shoulders pattern is near 4430. While we are now in a short term uptrend, to confirm an intermediate term uptrend we need the Nifty to go above 4500. While head and shoulders are more reliable on daily and 60 minutes charts, they are not very trustworthy on 30 minutes/real-time and weekly/monthly charts. Had this pattern been visible on a 60 minutes chart, I would have been more convinced but it is not visible there. Another problem that I see with the pattern is that the Relative Strength Index (RSI) is finding constant resistance at 60, as marked by the circle. Its inability to go into the bullish zone may not be a very bullish sign. But we are in a short term uptrend and with the resignation not expected in the next two days, as a day trader I would be looking to go long, rather than short. As a swing trader/investor I would wait for more confirmation to determine whether this rally is just an aberration or is it for real.

A comment was posted by Sanjay in yesterday’s post asking whether we are in corrective wave C of major wave 4 or otherwise. Well, Elliott Waves Analysis is a very specialized topic and while I have a working knowledge of Elliott Waves, I wouldn’t call myself a specialist. But, as far as my knowledge goes I have tried to do an analysis of the wave counts in the cycle/super cycle degree. I would request specialists of EWs to post a comment (if they happen to chance by this post) to tell us all if our analysis seems to be correct or not.

Pasted above is the monthly chart of Nifty along with the wave counts (as I perceive them). Our counts start from the low made in April 2003 at 920, the place marked ‘0’. In my opinion this wave lasted upto Jan 2004 when it made a high of 2014.65. The wave 2 corrected a little more than 61.8% of wave 1 upto a level of 1292.20 in May 2004. Then started the major wave 3 which ended in Feb 2007 after making a high of 4245.30, which turned out to be slightly more than 261.8% of wave 1 (269.77% to be more precise). One can also see another 5 wave structure in wave 3 as marked by the numbers in brown. The corrective wave 4 was rather a small correction. Wave 2 having corrected 61.8% of wave 1, one would have expected wave 4 to correct 38.2% of wave 3 to a level of 3117 but it managed to correct only 23.6% of wave 3 upto 3554.50 in March 2007. Wave 5, according to me, started from there to end in Jan 2008 at 6357.10. With the wave 5 (2802.60 points) almost as long as wave 3 (2953.10 points), yet falling short of the length of wave 3, it is in conformation to the Elliott Wave principles that wave 3 is usually the longest but never the shortest. So from Jan 2008 till now we have been in the corrective waves A,B,C of the complete bull market cycle. And, we have now, probably, seen the end of wave C after the 3-3-5 pattern that it followed while completing waves A, B and C.

From hereon, if our wave counts are correct, then our previous low of 4093.20 made yesterday should not be broken. However, there is only two things that are worrying me and the first one is the fall of the government. While the market has already discounted the fact that the government would fall, yet a sharp knee jerk reaction could come which, probably, could take us below the previous low. The other thing that is worrying me is the fact that we are only 25 weeks or 6 months into the bear market. Usually, Fibonacci numbers hold a lot of importance in the markets and one of my previous posts mentions how the market made important highs/lows after a specific number of weeks and how that number always turned out to be a Fibonacci number. Going by that logic we should see the end of the bull market in 34 weeks which should not happen earlier than the last week of August.

Let us assume that our above logic is wrong and that our wave counts are correct. In that case a new bull market should start now. But do we expect new highs soon? No. A new bull market will always take time to build up. A long period of base-building will happen in the beginning of a bull market. There is a lot of pessimism when the first wave up of the bull wave is seen and people view it as a bear market rally rather than a bull market. The second wave down reinforces the fear that the bear market is continuing. It is only when this wave fails to go below the previous lows and another rally is seen that people realize that it is a new bull market. That is when the volumes come in and people come and buy in large numbers. Exactly the reason why the third wave is the longest wave. Then a correction comes about and the fourth wave down just cools down the overheated market and makes valuations appear a little more reasonable and the fifth wave starts. Now the people again come out in hordes to buy and think that since this is a bull market nothing could go wrong and conditions become euphoric and one knows that it is all about to end soon. Sir John Templeton, a famous stock investor, has rightly said that “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Right now the conditions are pessimistic, there are rumours of a government fall, I am expecting the markets to stay low till end of August and there are analysts predicting the Sensex to come down to 12000 levels and there are a few analysts who are pessimistic enough to expect 9000 on the Sensex and some like me who once predicted the target of Nifty to be 2600. There is a lot of pessimism around and I am wondering if this is the birth of a new bull market?

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Will the Prime Minister Resign Today?

Yesterday the RBI increased the CRR to 8.75% up 50 basis points and increased the repo rate also by 50 basis points to bring it to 8.5% as against the 8% that it was at currently. This was largely expected by the market, but a small and immediate reaction was to be expected, as our column had predicted yesterday. And that is what happened at the opening bell. The Nifty opened a 100 points down and immediately started recovering from there. It recovered for a couple of hours before it went into a small 30 points range for over 3 hours. Finally, it showed a brief and small spurt in prices in the last 30 minutes.

The UPA-Left meet was expected today on the nuclear deal issue and since that did not happen till the market closed, there was no reaction. It is surprising that the government has yet again managed to buy more time. This time the members of the meeting decided to meet again to ‘finalise the findings’ on the deal. While it was announced that the meeting would take place ‘in due course’, it is not expected to take place before a couple of weeks. Meanwhile, there were rumours (as reported by a news channel) that the Prime Minister, Dr. Manmohan Singh, may tender his resignation before the G8 summit which is to start on July 8, 2008. There is a report of a cabinet meeting being held at 11AM tomorrow. I wonder if Dr. Manmohan Singh will submit his resignation to the cabinet then.

Seen above is the same 60 minutes chart of the Nifty that was shown yesterday, except that it has been updated with today’s data. As expected and discussed in yesterday’s post, the Nifty bounced back from its wave 5 target levels after a positive divergence was seen between the Nifty and its Relative Strength Index (RSI). If this was the end of the wave 5 of the corrective wave C, it would mean that the bear trend has ended today. Is it so? Well, that is very difficult to say right now. That is the problem with the end of trends. It is not possible to say that the trend has changed unless a confirmation comes through. Unfortunately, a confirmation of the intermediate trend changing will come only if the Nifty were to cross 4680, while a warning that a trend change might occur will come if the Nifty were to cross 4530. This level may change with time. Elliott Wave specialists can say with certainty whether the trend has ended or not even before the confirmation comes. But I hear no analysts shouting from the rooftops as yet that this is the end. I, myself, am no specialist of Elliott Waves but my analysis says (considering that our wave counts are correct) this may have been the final low made by the Nifty in this downtrend. However, if Dr. Manmohan Singh does resign tomorrow, we shall have another deep knee jerk reaction which will lead to capitulation and then a final low being made. It is difficult to say whether a final low would be made now (in a day or two) or shall we have to wait till the last week of August as our analysis on Fibonacci techniques suggested in an earlier post.

The Nifty opened about 100 points down today but I wouldn’t go as far as to say that it was capitulation, mainly because there was no selling climax. In the absence of a capitulation and a selling climax, it will be very difficult (and risky) to say that a final low has been made. What options are we left with? A short term uptrend shall be signified above 4328 while an intermediate term uptrend, as already mentioned, shall be confirmed above 4680. I’m afraid, at the moment we do not have too many options but to wait and let the market tell us what it wants to do. I would be much more confident about predicting the markets after the government falls. Let us see if that does happen.

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