Earlier Nifty Lows to be Tested Soon

Friday was a bad day for the markets. Markets opened flat and slightly upbeat owing to the excellent results posted by Infosys. Good results were expected to offer a positive kick to the markets. Though, the mood was upbeat, yet there was cautiousness in the markets as the market was waiting for the future guidance. Sure enough, the Infosys management increased the guidance for the next quarter and for the whole year. But what it also did was that it did not increase the guidance in dollar terms. That started a brief sell off. But soon the inflation numbers came in too with inflation increasing to 11.89%. I wonder what caused the markets to go up after these numbers came in. But whatever it was, it didn’t last long because the IIP (Index of Industrial Production) numbers came too and that showed a growth of only 3.8% as compared to over 10% last year. I think that was what caused the massive sell-off which took the Nifty 200 points below its high but closed 113 points below Thursday’s close.

Looking at the daily chart of the Nifty attached above, one can see that the Nifty was rising in a small channel since the last two days. It was clear that we would come in an intermediate term uptrend if, and only if, the Nifty were to cross 4300 levels. That failed to happen, which means that this was just a bear rally which fizzled out and which could take us to levels much lower than the earlier lows of 3850. However, there is a fairly strong support available between 3850 and 3900 which should stop the Nifty from falling below these levels. A move below 4000 will be fairly conclusive proof that earlier lows may be tested, if not broken. But the Relative Strength Index (RSI) shows that it has not gone below 40 in spite of this sharp fall yesterday. If this support at 40 holds, we may recover from the current levels. But, seeing the momentum of the fall on Friday, that seems to be only a remote possibility.

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Crashed Hard Disk

Hi Guys! I am sorry but my machine's hard disk crashed. I have got it reinstalled and reformatted but all the problems that come with the crash are there. I have yet to get my charting software reinstalled and get all the data back. So, today I will not be in a position to do any analysis. Hopefully, I should be up and running by the weekend and will bring you my analysis of the markets on Sunday evening/night.

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Nifty Target of 4300 Visible in Short Term

The Nifty opened with a huge positive bias because of all the positives visible in the Indian political situation and the global markets, as were mentioned in yesterday’s post. The Nifty jumped up about 130 points in the first five minutes of trade and about 160 points up in the first fifteen minutes. Things then cooled down a bit and the Nifty came back within the range discussed in yesterday’s post. It was only in the mid-afternoon when the European markets also opened positive that the Nifty broke through the trading range and went on to make new highs for the day.

Above is the 30 minutes chart of the Nifty and shows that a triple bottom has been made over the period of the last 10 days. This is the first time in the 8 months history of this blog that the Nifty has made a triple bottom. The blog has seen lots of double bottoms and double tops but never a triple bottom. A triple bottom is a reversal pattern, as are the head and shoulders, double tops and bottoms and triple tops. A reversal pattern means those patterns that are generally found towards the end of trends. This triple top being confirmed may well show that the downtrend of the Nifty has now finished, at least in the short term. We are now in a well defined short term uptrend, the target for which is at least 4300. It may find resistance near the trendline marked by the arrow which lies between 4310 and 4320. A move above that trendline may turn out to be good for the markets.

What is the future of the markets? Have the markets made a temporary bottom or a major bottom? Is there any more pain left in the markets? Here is a video which gives both sides of the story. You pick which side you want to believe. I, personally, agree with Surjit Bhalla of O(x)us Invt and fully agree with him that markets do tend to bottom out 6 months before the economy does. And I’m pretty sure that the fundamental situation and economies of the world will be showing a much better picture than what has been painted today.

So, what do we do? I feel there is no point trying to predict whether the markets will go down or go up. We should just follow the trend. We buy now in the short term because the short term trend is now up. We should buy with a medium term time frame when the intermediate term changes to up. No attempt should be made to predict the markets because that brings a bias in our trading decisions. We let the markets decide what it wants to do because markets have a mind of their own, a brain of their own.

On a lighter note, like all of us, the market’s brain is divided into two sides – a left side and a right side. Unfortunately, the left side has nothing right in it while the right side has nothing left in it.

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Left Withdraws Support, Markets Rangebound

With the Nikkie down 225 points down and the Hang Seng down roughly 350 points when our markets opened, our market was bound to open with a downward gap. The Nifty lost about 100 points in the first five minutes itself. The Nifty hovered around those levels for the next couple of hours and then started inching its way up. It had recovered only about 80 points from its lows when the news came out that the Left front had withdrawn support from the government over the nuclear deal issue. That caused the Nifty to come down again but the news was taken rather bravely by the market and by closing the Nifty had lost only 40 odd points.

It is clear now that the Nifty will remain inside a narrow range for sometime. Attached above is the 60 minutes chart of the Nifty which shows that it has now been moving within a narrow range between 4100 and 3850. One can also see that the last two troughs saw a low being made near 3900 which acts as another minor support. Confirming that the Nifty is going to stay within the range is the Relative Strength Index (RSI), which has been consistently finding resistance near 60 and support near 40 as indicated by the green arrows. A stock or, for that matter, an index can remain inside a range for hours, days and even weeks. We don’t know how long this range is going to be but since it is a very narrow range, it should be broken soon. A move outside the range should give a movement of about 200 points, depending on which side it breaks out on. While no positions are advised till the Nifty remains within this range, yet buying a 4100 call and a 3900 put (July expiry) should be a good strategy at the moment. With the Nifty at 4000 today, both should be fairly cheap. At closing, the 4100 call was available for Rs.80/- while the 3900 put was available for Rs.150/-. It amounts to an investment of Rs.230/- for unit of Nifty or Rs.11500/- per lot of Nifty. On breakout, the losing position should be closed while the other should be carried on. Since the target after breakout is only 200 points and the investment is Rs.230/- one should not expect a lot of profit from this but this is fairly safe. And if the breakout comes soon, one may gain more than expected because the time value would still be there in the option prices.

Let us talk some politics now. The Left withdrew support and yet the market went up. Why? Well, mainly because the government has already got the support of the Samajwadi Party and while it still falls a few votes short of the magic number, it may be able to get the support of a few independents and small parties before the vote of confidence. There are a lot of positives from the developments today. Firstly, the government has announced that they will go to the IAEA with the nuclear deal. If the deal goes through it will be a big positive for the markets. The Left withdrawing support may actually turn out to be good for the government. With the Left providing support, the government had not been able to introduce any reforms in the last four years. With the hurdle now out of the way, the government may actually be able to do something good for the country, provided the Samajwadi Party does not act funny. An early election would mean elections in November while according to the normal schedule elections are to be held in April-May 2009. So, a six months early election won’t be very materialistic for the markets. In fact, an early election may be good for the markets because it only reduces the time of uncertainty (except that then it could jeopardize the nuclear deal). The Prime Minister, Dr. Manmohan Singh, who is now in Japan attending the G8 summit has sent signals home that the Chinese may not oppose the nuclear deal and if the government continues the deal may go through. The US has already committed that it will help lobby India’s case with the Nuclear Suppliers Group (NSG). So, there are a lot of positives today. A lot of small investors understand the Left withdrawal to be a negative but it is more of a positive than a negative.

At the time of writing this post, the European markets are between 1 and 2% down while the Dow is about 50 points in the green. But a big positive is that the crude is slipping. It is already down to $136 a barrel and with such a sharp fall it seems the uptrend may now have ended. A proper analysis of crude would be done in tomorrow’s post.

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Small Range Between 3940 and 4110

The Nifty opened with a big bang today and soon reached near its earlier pivot high of 4105. The Nifty made four attempts during the day to cross that barrier but it proved to be a very tough resistance. Finally, in the late afternoon trade, after news came in that there was a suicide bomb attack on the Indian embassy in Kabul, the market started falling. It fell pretty sharply for whatever time was left in the session and let the Nifty close with gains of only 14 points during the day.

Seen above is the 30 minutes chart of the Nifty which shows that the Nifty went through the resistance line with a bang today on opening bell itself but that is where the problems started for Nifty. It reached its previous resistance which happened to be the pivot high formed last week. After trying to go past the resistance for most of the day, the Nifty failed to do so and fell sharply in the afternoon. As shown by the green lines, the Nifty is now in a range between 3940 and 4110. The ADX indicator which is still below 20 will remain at low levels till the Nifty remains within this range. A breakout from this range – either up or down should take the ADX to levels past 30. What is to be noted is that the ADX indicator on the daily charts is still at 51. For the Nifty to change its direction, the ADX should first slow down to levels between 20 and 25 before going up again. A prolonged stay within the range for a few days should do that for the Nifty. For now expect a short term uptrend above 4110 and a short term downtrend below 3940/3850.

I had to go out somewhere and came back late. Since it is now very late in the night, I won’t go into too deep an analysis and just rest my pen here tonight.

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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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The World Around Us

Today is a weekend and on weekends I, usually, write about general things for which I don’t get time during the week. On previous occasions, I have written about mutual funds, the US Recession, Retirement Planning, Greed and Fear, Renewable Energy, Price to Earnings Ratios, Rules for Analysing Charts, why technical analysis works, Fibonacci Techniques and have done a couple of webinars also. The whole week a question keeps propping up in my mind that what am I going to write about this weekend and sometimes my mind draws a blank and I don’t know what to write about. Today happens to be one such weekend. Maybe you readers can give me some ideas about what I should write about. Just send me a list of topics about which you need some more information and I can keep picking up a topic from the list and every weekend I can write about a different topic. I hope to get a list which could last me 2-3 months. So please send in your lists today.

Though, I didn’t know what I should write about, but then I thought why not write about something which seems to be driving our markets. And in my opinion, there are three things that are driving the Indian markets, namely, inflation, crude prices and the American markets. Inflation, I feel, is more because of the shooting commodity prices the world over rather than being an Indian phenomenon. The government is trying to control inflation by regulating the supply of commodities or by raising interest rates but when the inflation is driven by external factors how can we control it with these measures? Though, I’m not much of an economist but I feel there could have been better ways to reduce inflation than this. I’m shocked at how horribly wrong the Govt. was. According to this news report the Central Government had said on April 19, 2008 (when the inflation was 7.14%) that they would bring down the inflation under 5% in the next two months.

Well, about crude prices the sky seems to be the limit to which the crude prices can go? Will this never end? Will crude go to $200 a barrel? When I don’t understand anything I make use of technical analysis. But I have done the technical analysis of crude in an earlier post too with the help of Elliott Waves and had suggested that crude could make a high near 6300 or $148.50. Things have changed today. Crude, after a $10 jump that day slowed down and is now gradually inching up. This gradual increase has pushed the target upto between 6500 and 6600 (in rupees), which means it could go upto $157 a barrel. But I also saw the short term chart of crude and I found it to have some similarities with the chart of the Nifty. Let us see how.

Seen above is the daily chart of the Nifty showing the period between November 2007 and January 2008. Significant in this chart is the presence of dojis. I’ve mentioned in numerous other posts that a doji is a day when the open and the close of the day is the same or is very close to each other. In this case, the candle that is formed has an upper shadow and a lower shadow but a non-existent or a very small body. All such dojis have been marked in the chart above with green arrows. Dojis are signs of indecision/confusion. Such indecisions and confusions cause a strong trend in the market to slow down and then reverse. This is exactly what happened in late January after a series of dojis were seen in late November, all of December and the initial part of January. Another thing to note in the chart is the presence of the ADX index which measures the strength of a trend. A strongly trending stock/index will show higher values of ADX while a trend slowing down or a stock/index going through a consolidation will show lower values of ADX. This ADX, which was as high as 47 in late October came down between 15 and 20, when the Nifty actually reversed.

Let us look at the crude chart for the period between mid May and now. The similarities seen are obvious. This chart also has seen a number of dojis in the last two months, though, may not be as many as were seen in the chart of the Nifty. Looking at the ADX indicator, we can see that here too it made a high of 47 and then came down to levels between 25 and 30 and is now at 33. The striking resemblance between the two charts shows us that the high for crude oil may not be very far off. What also cannot be ignored is the presence of so many red candles. The chart looks more red than blue even though this chart is of a period when it has been in an uptrend.

And lastly, let us take a look at the American markets too. Seen above is the chart of Dow Jones Industrial Average for a period of last one year. We can clearly see that the trend has been downwards. The chart currently shows no indications of the downtrend finishing or an uptrend building up. But there are a couple of things which I want to share with you. The first is the trendline drawn from June 7, 2007 till date. This trendline shows that there may be support nearby near 11100. And a one year long trendline, which has been tested 4 times in the past should provide a pretty strong support. Secondly, the Relative Strength Index (RSI) is currently near 20 and considering that the downtrend has been in place for the last 9 months, a level of 20 is highly oversold which has never been seen in the last year, at least. Both these things show that a support, could only be a short term support, is nearby. And that is what we are expecting with the Indian markets too. More downside possible but a short-term low may have been formed.

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