Aug 222011

Followers of this blog would know that I had been stubbornly insisting that the level of 4800-4700 on the Nifty has to come through before we could even talk about upside potential for the Indian markets. Having reached those levels on Friday, what next for the Indian markets?

In my June 14th post, we discussed the bullish and bearish possibilities for the NSE Nifty and had mentioned that the path shown for the bearish case was the bare minimum outcome. So if the bare minimum was 4800 Nifty, how much more can the Nifty head down? Now for the record, I was probably the only one who spoke about India having entered a bear market and the 2009 lows of Nifty being at risk as early as January 2011 and some of my friends in the media tell me the worst  they have heard so far is 4200 Nifty ( you might want to read here, here and here).

So what is the basis for 2009 lows? It is the BIG PICTURE on the Nifty.

Nifty - Monthly Charts

The chart above shows the monthly movements of Nifty since 1995. Let me keep this simple without labouring too much into technical jargon. The charts are telling us that the Indian markets are probably still correcting the steep rise from 2003 to 2008 and the potential to revisit the lows of 2009 is still out there. Now slightly technical - Elliott Wave guidelines states that Waves 2 and 4 tends to alternate and since Wave 2 Circle was a zig-zag, the potential for wave 4 Circle to be a flat corrections is quite distinct.

Of course there are other possibilities (like Wave 4 circle ending up as a triangle) but given that we have highlighted in our August 4th post that the global markets are in a bear market, I see this as the preferred path. Of course, we will be flexible and listen to Mr Market if we see signs pointing in the other direction. We can expect the best from the markets but one has be prepared for the worst. So, do not be too early build a portfolio looking at the sharp fall in price.  Remember, that market bottom formation is NOT an EVENT, it is a process. Even if this view turns out to be wrong, we will end up buying the market say 2-4% higher than the big low registered. That I think is a fantastic insurance, given that the other scenario presents a market drop way way below current levels.

And for heaven sakes - do not think about QE3 coming in and changing the direction of the markets. Here is a little peek into what happened after QE2:

QE2 was announced on Nov 3rd, within days three of the indices from BRIC countries peaked (India, China and Brazil) and so did the Hang Seng Index, Singapore STI and Colombia Index. Within in a month of QE2 many frontier markets peaked. So, we are better off keeping track of the trend rather than the noise of news.

Jul 112011

On Friday, India's benchmark Nifty saw some brisk selling and markets finished near the lows of the day. The selling pressure  reversed 75% of the previous session's gain and thereby producing the technical pattern known as "Dark Cloud Cover" (DCC) on the daily charts.

Nifty - Daily Chart

Questions that come up: (1) was Thursday's thrust above the medium trendline connecting through November_January highs a fake-out? (2) Is it going to beget further selling; (3) How does one position - buy the dip or sell the rip?

I wish the answers were plain and simple. The Nifty is in the midst of a very complex correction.  There are various ways to interpret the movement that has come off the June low of 5195. What is however clear, whether one is bullish or bearish is that, that a decline is under way and only the amplitude is in question. At 5735, wave v was equal to wave i (see chart for labelling), which is a normal ending relationship. So the high at 5740 was just 5 points over the ideal scenario. If the current decline continues beyond 5480-70 zone, the odds that the high at 5740 was a head-fake would increase. As long as Nifty holds this zone of 5480-70, I see this corrective rise having potential to make an attempt at more push higher which may end slightly above 5750 or fail at 5750.

If I were a nimble trader with 1-3 day time frame, I would trade banks and cap goods from the negative side. I were a conservative trader, I would stay very light until Nifty drops to 5480 or breaches 5750.

Jun 302011

I'm posting this update on Nifty from my holiday spot in Bangkok, so this will be short.

Nifty - Daily Charts

On the charts above, note those small violet squares (you may want to click on the chart for a zoom) that mark the swing highs and lows. This is how waves progress, each move moving beyond the extremes of the previous move and in a five step fashion. So, I'm treating the current move as a corrective move to the decline of 5944 to 5195 and not as a trend change. If you heard me on CNBC on 20th June, the day markets hit 5195, I had expected a reaction to 5485 but this one has been stronger than that. Nevertheless, it would have prepared you to go slow on the bearish side.

Going ahead, the rise from the June 20th low should remain "a three" for the bearish case. Hence, we should expect Nifty to start reacting lower from the red trendline marked on the chart (5720 and falling by 5 points each trading session) - which would raise the prospects of a descending triangle OR react lower from 5660's. Either case, I would NOT put my feet back on the bearish pedal atleast till I see a lower high registered. I have plotted a couple of possible routes on the chart.

Signing out, until my next update from Singapore - man, its really hot here!

Jun 212011

In yesterday's market action, India's Nifty breached an important trendline in a convincing fashion. All the corrections since Nov 2009 stopped right at this trend-line (see chart below) and kept the up trend intact.

Nifty breaches a 20 month trend-line

The weight behind this breach was ONGC, which also happened to complete a Head and Shoulders top on its weekly chart.

ONGC completes a head and shoulder pattern

Though Nifty is yet to break the February low of 5177, considering the fresh weakness in top four Nifty stocks (ONGC, Reliance, TCS, Infy), it looks like it would just be a matter of days before this level is violated. Relief rallies if any, are likely to come under pressure between 5400-5485.

Jun 142011

The Nifty has been in the range of 5600 to 5400 for the sixth week and has kept everyone guessing as to which way the range would resolve. As a good trader, one needs constantly play devil's advocate to your own views. So, here are the charts that present both the bullish and the bearish views.

If you are a bull:

Nifty - Daily Charts - as the bulls would like to read

The above Elliot wave count assumes that the November high was only a portion of a larger bull run and further gains are yet to follow. The violet wave 1 ended at the November highs and the subsequent decline into the January lows of 5177 completed the corrective wave violet 2 (which sub divided as a zig-zag red ABC).  This would mean that the move to the May high was wave 1 green (impulsive)  and is part of the powerful wave 3 violet which is likely to reach levels way beyond the all time highs.

Line in sand - If Nifty dips below 5320 it would weaken the bullish case though only a breach of 5177 would completely negate this option.

What's in favour? - Despite the global and regional weakness, India has been holding up well in the last few days.

What's against? - Reliance and ONGC ,the two heavy weights, are showing weakness. A big negative pattern  is under construction in ONGC. The assumed wave count to the May highs is a truncation - which normally does not help the case. The blue dotted trend-line shown is also likely to place a lid on the upward move.

If you are a bear:

Nifty - Daily Chart - as the bears would like to read

The bearish case has multiple options and I have taken the least bearish option. If we assume the November high was the end of violet wave 1, the decline into the January lows was only part of a larger correction Violet A, that sub-divided into red ABC. The rise into May high is assumed as corrective in nature, Violet B (which again sub-divided as blue ABC). The ongoing move from the May high is part of the Violet C wave decline which is expected to sub divide in to 5 waves. Of this 5 waves we have probably completed the first wave of the decline (blue 1 of Purple C) and we are the beginning of a powerful wave 3 (blue 3 of purple C) that would take market below 5000 (black arrows) or the corrective wave 2 is yet to complete(blue dotted path) before the powerful blue 3 of purple C takes Nifty well below 5000.

Line in sand - A move above 5650 would weaken the bearish case though only a breach of 5944 would force us to suspend the bearish bets.

What's in favour? - Exactly what is against the bullish case favours this - ONGC and Reliance. Also, the Dollar Index seems set for a powerful move that is likely to unleash a destructive move on most risk assets across the globe.

What is against? - Nifty has not managed to consolidate on the advantage of taking out the March lows and move briskly below the January lows.

PS: If you would like to know which side i'm leaning - i've been on the bearish side since November and I continue to do so.

Mar 282011

The 2.3% bump UP for the Nifty on Friday was quite smooth and brought a lot of cheer on the streets but the CRITICAL 5690 level still remains unconquered. Given the smart rise of the previous week, it may not seem formidable after all. Nevertheless, we will have to wait and see what the market does. So, let us do a what if scenario.

a) What if 5690 is taken out - the bullish case. The market structure that we thought was unravelling in this post would not be the case and markets would continue to head higher. The problem here is, the market has spent more days between 5600 and 5200 than it took to decline from 6182 to 5177. So it is looking more like a short-term bullish picture. And the question - How much higher? It could be around the region of 5900 but may not be much higher.

b) What if 5690 is not taken out - the bearish case. Obviously the old targets would still be alive while we may still have to see if we need to slightly review the market structure. But the markets need a quick decline - the longer Nifty holds above 5600, the odds of the bears losing advantage would increase.

A couple of  things that needs to pointed out here. Firstly the volume of the short-term breakout did expand slightly, it was nothing exceptional as the media is projecting it to be (see the horizontal blue line on charts).

Nifty - Daily Charts

Secondly, while the small caps and mid-caps tend to follow the large caps, they are yet to clock higher highs - risk taking is not yet back, at-least so far.

Mar 142011

When earthquake/tsunami struck Japan on Friday, I'm sure you would have heard in the media how this was affecting the sentiments of the markets. Here are few things one must know :

Let us take a look at the powerful Kobe Earthquake that struck Japan in 1995 and caused $102.5 billion damage:

Nikkei - during Kobe Earthquake

It is obvious from the chart that the Earthquake occurred during the down trend and did not create any reversal on its own.

Now let us a look at the Latur Earthquake that left nearly 8000 dead in India and its impact on Sensex.

Sensex and Latur Earthquake

What about the Tsunami of 2004 that left 230,000 dead in Asia?

Nifty during Tsunami04

Looking at the charts, if one were to think no natural disaster occurred on Dec 26th 2004, he/she can be excused!!

The picture is similar even if one looked at the man-made disasters like Bomb blasts and terrorist attacks!

The infamous WTC attack:

While the reaction may have been pronounced, would it have mattered had it occured when the market trend was up?

So let us look at markets reaction to mumbai serial blasts of August 2005:

Nifty during the Aug 03 Serial blast

So, the next time you hear someone on media say that such and such exogenous events is causing the markets to decline you might want give these charts a thought. While there might be initial knee jerk reactions, these events do not even cause short term reversals!!! All one has to know is, what is the trend.

Correction or trend reversal?

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Nov 152010

In June, I had posted a note on this indicator and wanted us all to keep an eye on it. However, the indicator averted a double top risk and stayed above the previous trough during the May-June correction. Once again its time to keep an eye here. If this indicator dips below the orange line, it would be first warning sign that the existing uptrend is starting to turn weak. Although the possibility of a trend reversal exits only below the red line. I will post an update on this indicator if the indicator dips below either of these two levels.

Indian economy barometer

However, this time around there are couple of things that are loaded in favour of the bearish camp. One, Reliance is an under performer unlike the previous time. Two, SBI, a key leader in this rally, has also started to show pronounced weakness. Thirdly, there is a pronounced negative divergence on Nifty/Sensex daily charts.

What's favouring the bulls? The longer term momentum has matched with the price peaks and one possible wave count points to another leg up (need not result in a  high though).

Sep 082010

The readings on NSE India VIX are approaching extreme levels. Although they haven't yet reached the most extreme readings since its inception but it is at its lowest readings on a closing basis. The current level of complacency is much more than it was during the January 2010 highs.

India VIX - Daily Charts

As can be seen from the chart above such low readings have often corresponded to significant peaks of April highs, July/Aug 08 highs and May 08 highs. Had it not been for the limited history of India VIX, I will be sitting with a bucket load of puts.  But being a conservative trader, I prefer to act on things with much longer history. If aggression is your cup of tea here is a chance to pre-empt the market. Nevertheless, this is a chart that might be worth every trader's attention.

Channel lines puts pressure on Nifty

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Aug 272010

First post from Singapore - settling down here took a bit longer than anticipated. OK, back to markets 🙂

As can be seen from the chart below, the channel lines are putting pressure on the Nifty.

Nifty Daily Chart

Also, momentum peaks continues to disagree with the new price highs.

In my March 8th post, I had projected that Nifty should reach a minimum target in the region of 5600 but we dropped that stance in April expecting a correlated breakdown along with US markets. After initially declining to 4800 on the Nifty, Indian markets showed great resilience and outperformed almost every market in the world. So what has this got to do in the current context? The current high of Nifty satisfies the minimum level required for wave 5 completion (approx equals wave 1). Also, if Nifty closes below 5452 today (farther from this the stronger the signal ), a moderately negative to highly negative candle will be formed on the weekly charts.

Looking at the USDINR crosses, a symmetrical triangle seems to be in play and the upper borders of this triangle shares a common boundary with a medium term trendline.  A convincing move above this level will mean more weakness for the Indian currency and as a corollary further weakness for the stock markets.

USDINR Daily Chart

My guess is that the Rupee will hit the upper borders today and pull back into somewhere into middle of the triangle to lower borders of the triangle, gather steam and then push past the 47.15 breakout level. If this scenario pans out - there might another push towards the high for the Nifty after the current decline. Let us see how the market pans out.

We were more focussed about going to cash and buying OTM puts as protection rather than going short between April and July. Considering that September is historically one of the weakest months, we will consider being short in a small way and try to build on them if situation warrants.