Stocks Rally: Am I Missing The Bus?

Stocks in the Indian markets rallied for a fifth day in a row today. And this rally today was to be expected after our government won the trust vote in the parliament yesterday. This was to be expected because the Government's win would mean that the nuclear deal will go through (if the NSG and the AIEA do not object). This was good news for the markets because of which the Nifty opened above 4400 and finally ended the day at a high with a gain of 236 points.

I was out today and have just come back home and it is late at night so I won't go into the analysis of charts today. But before I finish, I would like to add one more thing here. A lot of my readers would be thinking that if the stocks continue to rally like this and this does turn out to be a bull market then, surely, they will miss the bus if they do not 'jump in' now. Well, as mentioned yesterday, I would say that this does not seem to be a bull market because the symptoms are not such. But the market can prove us wrong too. It surely can, but even if this is the beginning of a new bull market, this will also have to go through the customary corrections. And it will give us a lot of opportunity to enter. Today's close means that the market has risen 17.3% in just a matter of five days. And that is a big rise in a bear market and a correction has to come in sooner or later. It is just that we are not getting any negative news to trigger a correction. American markets are flat today, European markets closed with gains between a percent and a half to two percent and the Asian markets were also well in the green earlier this morning. Crude continues its downward journey and is now trading at $124.50.

My point is that new bull markets take time to build up whereas it is generally the bear market rallies which are sharp and give us a sense of hope. My point is that a market which has risen 17% in five days would be quick to fall at the first sign of a negative news. A correction of Fibonacci 61.8% can safely be assumed and if we assume today's high to be the high of this rally then that means a pullback to 4060 is possible. Even if it does not fall to that level, I would be more comfortable buying after the pullback is over than now (even if I have to buy a few points higher than what it is today).

Those who think they will 'miss the bus' need not worry because the markets would definitely see a pullback. One must exercise caution when 'jumping in moving buses' because it can lead to accidents and injury. It is wise to 'jump in' when the 'bus slows down' and I am waiting for just that time.

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Government Wins Vote, Loses Credibility

The Government today won the trust vote. Big deal! They managed to win the trust vote by 19 votes. 275 votes were cast in favor of the government, 256 against and 10 abstentions. While stability in the government was retained, our 'honorable' Members of Parliament made a mockery of themselves and the voting process on live television. Talks of MPs being ‘bought’ were now made public with three MPs claiming to have been bribed to abstain from the vote. The charges, whether true or not, have made us realize what all actually happens in politics (as if we didn't already know). The government, for sure, has won the vote, but lost its credibility, in the eyes of the ‘aam aadmi’ (common man).

The Nifty went up today too making it four consecutive days of ‘decent gains’ in a bear market. The Nifty opened flat in the morning but after news of Omar Abdullah’s National Conference (having 2 MPs) decision to support the UPA government came, the market started going up, solely because the support of those two MPs would have seen the government through the trust vote successfully. Since then the markets have been up only (except a small pullback to 4200) and managed to close on a high too. 80 points above yesterday’s close and 40 points above the top of the range which was at 4200.

Seen above is the tick by tick chart of the Nifty for today from 12:30pm onwards, which was taken from the NSE website. Clearly seen is a bullish head and shoulders pattern formed in the Nifty which has been marked on the chart. The pattern has already been confirmed and gives us a target of 4300 on the Nifty which happens to be 60 points away. Hopefully, that target should easily be achieved on opening tomorrow.

Attached above is the daily chart of Nifty which shows the kind of rally we have seen in the last four days. It has now risen more than 11% in the last four days, has crossed the downward sloping trendline on the daily charts, has moved out of the range and now has managed to close above its most recent pivot high of 4215. Is this a bear market rally or the beginning of a new bull market? Well, it certainly looks like a new bull market but I wouldn’t advise my readers to be too sure about it. My reasons are that new bull markets are born on pessimism and the new bull market rallies would never be as sharp as the one we have just seen. Secondly, a very common phrase in the stock markets is to buy on rumours and sell on news. We have seen the market moving up on hope that the government would win the trust vote. Now that is public knowledge and the smart investor may now be looking to book his profits rather than building a position. Thirdly, a true confirmation of a bull market is when the market is making higher highs and higher lows. As yet, we have just seen a higher high but not a higher low. A correct strategy would be to wait for a pullback and then a rally for two days to see where the new pivot low is formed. If the low formed is above the previous low of 3790 then it may mean that a bull market has started but if the pullback goes lower than 3790 then there may be more pain left.

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No Major Move Till Trust Vote

After two days of gains, we saw another good day today. Politics has become very interesting and Parliament has become a comedy circus with our honourable MPs going back on their words and changing loyalties by the minute. The numbers game and the ‘horse-trading’ continues as the countdown to the trust vote draws closer. At 4pm on Tuesday the members will cast their votes and it will become clear whether the UPA government will fall or will stay. This will become another nail biting finish going down to the wire.

As of now, the UPA has 269 MPs supporting it, 268 against it and 3 are still undecided. If the Opposition gets the support of at least two of these and the UPA gets one then it is going to be a tie and the speaker would have to vote. The speaker, Somnath Chatterjee, being from the Left, it goes without saying where his loyalties stand but to be fair to him, nobody knows who he will vote for in case of a tie, not even the Left. The closest finish so far was when the Vajpayee government lost the no confidence motion in 1999 by a single vote when Jayalalitha led AIADMK withdrew support from the 13 month old government. However, Vajpayee came back to win the elections and even lasted the full term as the leader of a coalition government.

Attached above is the daily chart of the Nifty. As suggested in yesterday’s post, 4165 was supposed to act as the resistance and today’s high turned out to be 4168 before closing at 4159. It is still not possible to determine whether this resistance would be broken or not. If the prices go above 4165 tomorrow, they could go to the top of the range at 4200. A breakthrough above 4200 will also mean that the next target for the Nifty would be 4600. I personally feel that tomorrow is going to be a dull day for the markets in terms of price change. But I do not rule out a volatile session (without any major change in the closing price). I do not expect the Nifty to go above 4200 before the vote is cast. But there may be a lot of participants who would like to close their long positions before close tomorrow, and some may even be willing to go short, to cash in on the opportunity if the government were to lose the trust vote tomorrow. This may take the markets down. The next two days are going to be news driven days and for technical traders it is the best time to go on a holiday since technical analysis does not work on news driven days.

There are no international cues to talk about right now. The European markets were nothing to write home about while the American markets, at the time of posting, were trading flat. Crude was about $2 dearer but that was only to be expected after such a sharp fall was seen in the last two days.

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Nifty Range Widens - 3800 to 4200

Another fantastic day for the Nifty (and for us) on Friday. The opening wasn’t great and it opened flat and remained so for the next three hours or so, before making a run for the tops. The run lasted throughout the rest of the day and in the end managed to close 145 points above Thursday’s close, which itself was 131 points above Wednesday’s, thus gaining 276 points in two days. Before these two days the Nifty had broken out of a range between 3850 and 4200 to go to a low of 3790 and to close at 3816.

Before these two days of gains, we could have said that the 350 points rangebound movement between 3850 and 4200 had been broken towards the downside and that the new target for the Nifty was 3500. Unfortunately Fortunately, that did not happen and we saw these two terrific days which makes us say that the range has only become broader now, broadly between 3800 and 4200 and a breakthrough on any side should give us a 400 points movement.

Seen above is the daily chart of Nifty loaded with the Relative Strength Index (RSI) and a trendline connecting the highs made in mid May and mid June and extended till now. This downward sloping trendline shows that there is resistance for the index near 4165, which will be difficult to cross. In case this resistance is crossed then we have another resistance which is the top of the trading range at 4200. A breakthrough through the 4165 reistance line will indicate that a breakthrough of the trading range may also take place. In case it reverses from 4165 then the inverse is also true that 3800 on the downside may also be broken. A clear uptrend will emerge when the top of the trading range at 4200 is broken through and if the Nifty manages to cross its previous pivot high at 4215.50. Indications of this trading range being broken through on the upside are bright since this is the first time on daily charts that a positive/bullish divergence between the RSI and the prices is seen, as seen from the brown trendlines and green arrows. A positive/bullish divergence occurs when the prices make lower lows while the RSI, or any other oscillator indicator, make higher lows. But a divergence cannot be taken as a confirmation of a reversal in trend. It only gives an indication that a change in trend may take place, whether it happens or not is for the market to decide. After all, there have been events in the past when the weather becomes all cloudy and dark and yet it does not rain.

Whether a low has been made in the short term or there may be more downside is difficult to say at the moment. It all depends on how the government, the opposition, the crude and the rest of the world behaves in the time to come. Any risk to the government will be taken negatively, crude continuing to fall will be taken positively while global sentiment will affect the Indian markets too in the same manner. What actually happens can be decided by the combination of all these factors and there is no point predicting the outcome of all of these situations. In times like these, just follow one simple maxim – “A trend is a friend and should be followed till the end.” And as of now (till the Nifty crosses 4215), the trend remains down.

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Nifty May Fall to 3500, Started Looking Attractive

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

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

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

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Nifty Breaks Down, Target of 3500?

The Nifty opened very weak because of weak American and weak Asian markets. Except for the first hour, within which it remained rangebound, never during the day did it show any signs of recovery. During the day there was news that Fitch Ratings has revised India’s local currency outlook to negative. Along with that it has also revised FY09 GDP growth to 7.7% and are looking at a fiscal deficit of around 6.5% of GDP. While this news was displayed and flashed on websites after the markets, the market must have known about it much before it was made public.

Looking at the 30 minutes chart of the Nifty, we see that a large range between 3850 and 4200 was broken today with the Nifty closing below 3850 in the last 30 minutes. With the Nifty breaking below this 350 points range, we have a downside target of another 350 points, which from 3850 translates into 3500 levels.

There are various targets for the Nifty now. A lot of people are talking about support at 3600. We ourselves have got a target of 3500, as mentioned above. One of my previous posts mentioned of a target of 3671.70 or even 3048.75 and yet another post talks about a possible target of 2600. Now, what levels the Nifty attains is for it to decide. We know that all these are just theoretical targets and the markets may or may not achieve them. We also know that when it reverses into an uptrend, it will warn us by making higher bottoms and higher tops and we should then take long positions. As of now, we are out of the markets and sitting on cash waiting for the most opportune time to invest.

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4000 Stop Loss for Open Long Positions in Nifty

Today was one day when the Nifty kept going up throughout the day, except for a sell-off that was encountered in the last hour and a half. At one point the Nifty went high enough to cross the figure of 50 points in the green but after the sell-off, in the last 30 minutes went as low as 40 points in the negative but then managed to close only 9 points below yesterday.

The Nifty, as seen from this 30 minutes chart shows that the index has been moving within this trend channel since the beginning of the month. It is constantly finding resistance near the top end of the channel and support near the bottom end. As seen from the trend channel, support comes in close to 4000 levels while the resistance level lies between 4230 and 4250. A move outside this trend channel should give us a reasonable big move. The two dojis seen at the end of the day and the Relative Strength Index (RSI) within the black circle, which shows that it is finding it difficult to go below 40, suggests that this downmove maybe over for the time being. But like always, every positive is accompanied by a negative, and in this case it is the fact that the last rally that was seen today, failed to reach the top end of the line. Now, which side of the channel will the prices break is for the market to decide. We shall just follow the trend as and when that happens. As of now, we keep the stop loss for short term long positions below 4000.

The fact that every positive is accompanied with a negative is what makes the markets so fascinating and thrilling. This is why the uncertainty comes in and why one person wins while the other loses money. If there is no uncertainty in the markets, the thrill will be lost. And this is why the markets, time and again, continues to remind us that our analysis is no good and is thoroughly wrong. This is why it is improper to predict the markets and wise to follow the trend. This is why we analyse the markets just to get an idea of what may happen and be prepared with a strategy if that does happen. And whether or not, that will happen is totally the market’s prerogative.

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