Wednesday, April 16, 2008

Smaller Range Broken, Bigger Range to Continue

There was a breakout today. The Nifty, finally, decided to break through the shackles of one of the ranges within which it had been arrested for the last 10 days. The fact that this breakout has come with a range expansion is a confirmation that the breakout was genuine. Range expansion means that the difference between the high and the low of the day was higher today than it was in the last 10 days. The 10 day average of the true range was about 130 till now but today the range was well over 200 points.

But what does this breakout signify. Well, technically speaking, not a lot. Except that the top of the smaller range (4830) now becomes the support and the top of the larger range (4970-5000) is now the resistance. As mentioned in yesterday’s newsletter, a clear trend for the Nifty will emerge only if the boundaries of the larger range are broken through, upwards or downwards. This breakout is definitely a good sign for short term investors as it confirms that the short term trend is now up and that fresh short term long positions may now be entered into whenever there is a small pullback to 4830 or in its vicinity.

Any upmove now should find resistance between 4970 and 5000. A sustained move above 5000 (2-3 days close above 5000) should be a signal that the intermediate trend has also changed to up. That should be a good time to buy. Once we cross 5000, I will tell you more reasons to buy, signs of which are visible now, yet it is too early to discuss a possibility which may not (I said ‘may not’, not ‘will not’) happen in the near future.

I never realized that to bring the market out of the pits, results from a company like Infosys Technologies would be required. With all the doom and gloom around, even a little bit of stability in American markets could not pull our markets up. A company like Infosys, a company in a sector which has grossly underperformed the rest of the market for many months, delivered results in line with expectations and the markets were very happy with that.

But what was so good about the results that the whole market suddenly gained strength. Well, it was not the results, it was the sentiment. The fact that the results were not bad, in itself, was a big sentiment boost for the market. But how good were the results? Infosys delivered a profit of Rs.4659 cr. against a profit of Rs.3856 cr. in FY 2006-07 and sales of Rs.16692 cr. versus Rs.13893 cr. in FY 2006-07, a jump of over 20% year-on-year in both the topline and the bottomline.

This was expected to be a bad year for Infosys and the expectations are no different for the coming year. But Infosys has given a guidance of an EPS (Earnings per Share) between 92.30 and 93.90 for the next year versus an EPS of 81.56 in the current year. At 93.90 it means a jump of over 15%. A company like Infosys, which has been known to announce results better than the guidance, is likely to show an earnings growth of 17-19% in the coming year. Well, if those are the expectations from a bad year, imagine what they would be in a good year. And if this is for a company which operates mainly in the US and has borne the brunt of the US recession (with decrease in onsite sales and a falling dollar), imagine what the results will be for companies which are virtually unaffected by the US recession. It is this realization that changed the direction of our markets (despite weak global markets) and changed the sentiment.

I have been saying since a long time that the US recession should not affect India much but unfortunately, it took the market a long time to realize that. All I would say is – better late than never. Maybe happier days are back again. But it won’t be very easy. The confidence of the market has been shaken up badly and there will be bouts of frequent profit booking and a small drop in the markets may lead to panic like situations. But those are the times, one should be looking forward to, the times which can give us many good opportunities to invest.

As mentioned in earlier newsletters, we are inviting our esteemed readers to send in their contributions in the form of articles to be published on this page. Take this opportunity to voice your opinions to the world about the rise today, the markets in general or anything remotely connected to the markets. Please e-mail your articles and don’t forget to mention your name and location so that you are given due credit for the article that is published.

Happy investing!!!


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