'Boom, Doom and Gloom'

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Anyway, back to the markets. It’s all looking gloomy right now. The intermediate trend of the Nifty has been down for the last three weeks now. The short term trend had turned positive for a short period of time but that also has become negative now. The Nifty has now confirmed breakdown from two patterns. One is the channel breakdown, the one which is represented by the smaller circle or by the two uptrending

blue lines. This was a 450 point wide channel and it broke through the channel at a level of 5170-5180. Considering that the breakdown is also of the same magnitude it gives us a target of 4720-4730. The green lines shown here at 5035 and 4900 are just minor supports inbetween.

The second pattern that we are talking of is much larger and much more ‘horrifying’, to say the least. This pattern is the inverted flag pattern and is shown within the larger circle on the chart. In this sort of a pattern there is a clear trend in place (could be an uptrend or a

downtrend) and then prices consolidate within a range (which could be a straight or a rising or a falling rectangle or could be a rising or a falling wedge) and then the prices break out of the consolidation and continue the previous trend which was in place. The ‘horrifying’ thing is that such patterns are formed approximately half-way between trends. And if this indeed is half-way then the target for the end of the trend is, hold your breath, 3820.

We have been saying that we are in a long term bull market and that we should be buyers on every dip. The definition of a bull market is that we (rather, the chart) should be making a pattern of higher highs and higher lows. And the converse is true for bear markets. We have three trends which we usually talk about, namely the short term, intermediate and long term trends. Generally, we watch short term trends in the 30-minutes charts, the intermediate trend on daily charts and long term trends on weekly/monthly charts. We are already in a short term and intermediate term downtrend because a pattern of lower highs and lower lows is visible both on half hour charts and on daily charts. We have a very good support at 4600, which is from an upward

sloping trendline drawn on the weekly charts. The moment this trendline is broken that would be the first signal that a long-term bear market may be approaching. The actual confirmation would come when the previous low (which is at 4002) is broken. That is why we say that till the time 4600 is broken, we should remain buyers on dips.

But this may call for a change of strategy now. We are predicting the target for the flag pattern to be near 3820 which is well below both 4600 and 4002. If this target is achieved, we would no longer be in a long term bull market. That is why, we should now modify our strategy. Our strategy should be that “I am in a long term bull market which is true as long as Nifty is above 4600. I will assume that the long term bull market will continue to be a buyer on dips, but with a stop loss of 4600.”

We should not take any positions against the trend, which is why we are not talking of any buying opportunities right now. Life is full of ups and downs and so are the markets. Like in life, markets also see successes and failures (of patterns). Patterns do fail occasionally and this is one occasion where we would like it to fail. We would define failure of this pattern as a failure if (a) it fails to reach its target or (b) if it crosses 5650 on the upperside or (c) it comes back in the range of 5200-5650, in which case we can again wait for a pattern breakout/breakdown. As much as we may hope for a failure, one should be cautious as hopes rarely turn into reality in the markets. And the markets have their own minds. It may decide to go where we expect it to go (3820) or it may still decide to convert our hope into reality. Let's see what the market decides to do.

Your comments on this post are most welcome. Please click on the comments link below to post a comment.

Happy investing!!!


The following article has been written by Col. Mahesh Sharma of Surakshit Securities who shares his view on the markets.

IS IT REALLY ALL DOOM AND GLOOM???

All markets, particularly the Stock Markets, run on sentiments. In the middle of January this year history was made when the largest ever IPO by an Indian company (Reliance Power) was fully subscribed in less than a minute. By the time the issue closed it had been oversubscribed 70 times, which itself is a record for an issue of this magnitude. Yet, just three weeks after that we have had two IPOs, including Emaar MGF, which had been floated by a large Gulf based developer in collaboration with an Indian company, being withdrawn from the market. Such is the effect of sentiments in the market.

When the sentiment is good markets tend to ignore bad news and when the sentiment turns negative even the good news is overlooked. In today’s newsletter, we have seen the technical view of a chartist. Markets have a habit of over-reacting. In a positive sentiment there is irrational exuberance and we look for means to justify the extended valuations by discounting cash flows of future years and talk of embedded values getting unlocked. And when the sentiment turns negative we have a scenario of excessive pessimism with analysts calling it ‘doom and gloom’. The reality lies somewhere in between these two. And sooner, rather than later, the market will revert to the mean.

Let us take a rational view of what is happening today. Between 18 Jan, when there was almost a mad reaction of over 10 lakhs new demat accounts opened in a few days so that people could apply for Reliance Power IPO, and last week, when there were no takers for the IPOs of Wockhardt Hospitals and Emaar MGF, all that has changed is the sentiment. Yes, the market has lost nearly 1300 points on the Nifty, but, has there been any change in the fundamentals of the market?

We have, perhaps, a little more clarity of the American economy and it is likely that they are heading for a recession. However, the US Administration and Fed Reserve are fully alive to the situation and will do their best to ensure that suitable remedial measures are taken to protect the US economy. We have seen aggressive rate cuts by the Fed Reserve in January and there will be more to follow. Our Reserve Bank has refused to follow suit and is adopting a policy of status quo as far as the interest rates are concerned. This has led to a sharp differential (475 basis points) in the interest rates of the two countries. This is only likely to increase further when the FOMC meeting takes place next in Mar.

Water tends to flow where it has least resistance. Similarly, money tends to flow where the returns are better. The returns in Emerging Markets are likely to remain better than in US. And, within emerging markets, India, which is less dependent on exports to US and is growing largely on domestic consumption, is likely to continue to grow at over 8.5% in the next two years, at least. So, whether they like it or not, there is no choice for the US funds and institutions, but to invest in India. And, once the liquidity returns, one can imagine what it will do to the stock market, which after the recent correction is at a much healthier valuation. We have all seen what liquidity did to Indian markets in 2007, where even at a PE of 25, analysts on the media were crying hoarse to justify the rich valuations. And now, when we are down to a more reasonable PE of 17-18 times FY09E earnings, the analysts are predicting as if there is no tomorrow. All one has to do is to have conviction and start buying into fundamentally good companies, which are more oriented towards domestic consumption. So, all those retail investors and even some institutions who felt they had ‘missed the bus’ can safely think of ‘boarding’ the bus now that the valuations are more attractive.

Can the markets go down further? Yes, they can. I am not saying they will not. But then, we do not have to buy at the lowest. When the markets turn around, they may again lead to a sharp recovery. Though, I must admit that we are more likely to have a slow and gradual improvement rather than a V-shaped recovery. Nevertheless, there is not going to be too much of a difference between buying now and buying then. So, looking at things in a different light, this seems to be the best time to buy.

Good Luck!!!

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