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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Happy Investing!!!

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Target of 5300 Visible

The Nifty, on Friday opened in strength on Friday and remained range bound in a range of 40 points for a better part of the day and it was only in the afternoon session when the European markets opened that spurred a rally which took it past its highs of the day. A little bit of profit booking was seen near the end of the day which saw the Nifty losing about 15 points. On the whole, it was a green day with a gain of about 42 points.

As seen on this daily chart of Nifty, it has been rising since the last three days now and currently finds support at around 4950 and resistance near 5290. A move above 5290-5320 should be decisive for the markets. As seen from the charts, such a move will confirm a possible bullish head and shoulders pattern on the Nifty which could give us a target of around 6100. However, that is only a possibility and should not be acted upon till it happens. We cannot buy now on the assumption that a bullish head and shoulders pattern will be made. It is also quite possible that the market may go on to make another shoulder before actually crossing through 5300. One thing for sure is that we are in a short term and intermediate term uptrend (not to forget, that the long term uptrend was never broken) and that any dip in the markets should be used as a buying opportunity. Also shown in the chart is the 14 day directional movement ADX indicator which is currently around 18. A value below 20-25 suggests that the market may be going into or is currently in a sideways movement and it is not wise to take a position till the ADX crosses 25 or is at least 4 points above its previous lows. A move above 35-40 suggests that the trend may come to an end or slow down soon. A move above 5300 may probably also make the ADX go above 25.

The global signals are pretty positive today. The Asian markets were good on Monday and at the time of writing the Dow Jones is about a percent up i.e. 130 points in the green while the FTSE-100 closed 85 points up with a gain of about 1.3%.

I thought it might make some sense to look at the chart of Dow Jones also. As discussed in an earlier issue, the 9 month old trendline and the top of a 4 month old rectangle near 12740 was crucial and a cross above that would give us a target of 13700. This resistance was crossed on 21st Apr 2008 and has since gone through a pullback too and is now inching its way up. The downward sloping trendline at 13010 is providing resistance but at this moment, the Dow Jones is trading at 13132, much higher than this trendline. If it manages to close above this level (still about 3 hours of trading left in the day) today, it is on its way up to 13730 and then 14650. A close above 13010 will signify the end of the intermediate term downtrend in the Dow too.

Seen above is the daily chart of Aban Offshore and on it are seen three trendlines marked as 1, 2 and 3. Let us discuss each one in detail. The first trendline marked as 1 is the downward sloping trendline from the highs made on 29th Feb 2008 and Friday’s price movement confirmed that this trendline was broken. The second trendline, marked as 2, shows that the price has been finding resistance whenever it went to 4000 since 23rd Jan 2008, except for two exceptional days in February. The price did go above this trendline on Friday but closed well below it. The third trendline, the dashed one marked as 3, is an extended trendline starting from the lows made on 19th Mar 2007 (not shown on this chart). This trendline has been respected throughout except for the two areas marked by circles. A break of these three trendlines will be significant for Aban Offshore and the high volumes on Friday along with a large blue candle seems to suggest that this may soon be a reality. It may make sense to buy above 4000 with a stop loss of 3500 for a medium term target of around 5170.

Steel Authority (SAIL), if it manages to go past the trendline marked 1 on its daily charts would suggest an uptrend in the stock, which could take it to the next resistance near the trendline marked 2. The large blue candle with huge volumes on Friday seems to suggest that the price could go past this trendline on Tuesday. Consider buying above with a stop loss of 165 for a target of between 215 and 220. Revise the stop loss to 190 if the low is above 190 for two consecutive days.

Happy Investing!!!

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The Case of the Vanishing Strength

It was a mixed day for the Indian markets today. The markets opened on a weak note today and remained subdued for the next two to three hours. It was only at about 1pm when the markets turned in the positive but soon found resistance at higher levels and started coming down to close only 12 points in the green (Nifty) and 44 points up on BSE.

On the whole, it was a positive for the market that it recovered and closed in the green. What was not positive is the Relative Strength Index (RSI), which again failed to cross 60. It is marked by the blue circle in the chart above. The RSI, as the name suggests, measures the relative strength of the prices now with respect to its historical prices. Theoretically, RSI oscillates between 0 and 100 but 0 and 100 levels are rarely seen. RSI is considered to be oversold below 30 and overbought above 70. A lot of people prefer to say that RSI is bullish above 50 and bearish below it. I am one of the few who believes that RSI is bullish above 60 and bearish below 40. This is why I consider finding resistance at 60 a negative sign. All the strength visible on the charts now seems to be vanishing with the RSI not being able to cross 60.

There is another circle (green) marked on the RSI chart which shows that the RSI had found support at 40 in the beginning of the month. That was an early indication which showed that the prices could have broken out of the range. And that did happen. Today’s RSI is showing that the prices may fall soon, maybe as early as tomorrow. Today was the 6th consecutive close in the positive and it may show a red day soon enough. The last time we saw 6 consecutive up closes was in September 2007 (that time it was 11 consecutive up closes and that is actually quite a rarity). Such other occasions (6 or more than 6 up closes) were in Aug 2007 (8 closes), April 2007 (6 closes) and Nov-Dec 2006 (6 closes).

A downmove should find support between the 4900 and 5000 zone. However, if the Nifty were to fall below that there is a strong support at 4830 which should not be broken. A close below 4830 suggests bearishness. 4800 calls recommended in the beginning of the month could be sold off first thing in the morning. They are gaining about Rs.100/- per unit or Rs.5000/- per lot of Nifty (50 Nifties). No stocks are being recommended today since the market may come down tomorrow and things may be cheaper on Thursday/Friday.

Let’s take a brief look at the American markets. The Dow Jones Industrial Average (DJIA) was moving within a range between 11740 and 12740. Generally, too, there is a lot of resistance at 12740. A close above 12740 yesterday was bullish and that too with a gap. However, a problem with gap days is that the markets tend to close/fill the gap as soon as possible. If this were to happen as early as today then it would be considered a false breakout and we will come back into the range. A noticeable thing on this chart is that again the RSI has not been able to cross 60. But if this breakout is correct (we shall come to know in 2-3 days) then we have a target of about 13700 on the Dow. If that happens, our markets should also remain strong.

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 markets 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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We Shall Recover, We Shall Recover ... One Day

The Nifty opened on a slightly positive note on the back of global cues and soon started coming down. It was a little after noon when the Nifty made its low for the day at 4629 and then started going up and this move was good enough to reach the highs of the day.

We had suggested in our newsletter yesterday that the decline witnessed yesterday could be just making a shoulder or could be a new decline. We had also mentioned that in case it is a second shoulder being formed then support could be found near the low of the first shoulder at 4621. Though, it is not a rule that the low/high of the first shoulder should be close to the low/high of the first shoulder, yet since the pattern was thought to be a straighter pattern, we thought that support would come in between 4600 and 4650. And that is exactly what happened. The Nifty reversed from 4629, made a high of 4785 and then ended the day at 4745. Now, it actually looks like a second shoulder is forming.

We shall still be vulnerable to negative/positive news from within/outside India. Any drastic movement in the American markets tonight and in Asian markets tomorrow morning will have an effect on India too. At the time of writing of the newsletter, all European markets were between 1% and 2% up. So, no negative cues from Europe as of now. Since, we shall be following the world markets, there is no point predicting what will happen to our markets. As discussed yesterday, we shall follow the market in what it wants to do. At the moment, all we can say is that we have supports at 4630 and 4480 and resistances at 4800 and 4960.

In a previous newsletter we had spoken about the prospects of the Dow Jones Industrial Average (DJIA). We had said that a move above 12400 for the Dow will make stop the pattern of lower highs lower lows in the RSI. That did happen recently, the RSI did make a higher high. Now all that is left to be seen is whether it will make a lower low or a higher low. Strong resistance is still at 12750. While there are no buying signals that we are getting from the DJIA as of now, but some positives are visible. There is a bullish divergence visible between the RSI and the DJIA.

Whenever there is a massive fall in the markets, the investors lose their confidence in the markets and are not comfortable buying because they don’t know when the bottom will be made. It is only after a bottom has been made that the markets start recovering. The investors are still waiting to see whether it is just a bear market rally or a new recovery. That is clear only after the next bottom is made, which is almost always a higher bottom. The recovery that then follows is slow in the beginning and gradually picks up speed and momentum. That is the surest sign that the markets have recovered. But where do we figure in these stages? I personally feel that a bottom has already been made. A slow and nervous recovery came about and we probably are in the process of forming a higher bottom. These are only indications. Surety will come after the markets tell us. We can just hope for the best. Maybe the Dow will recover soon and maybe our markets will recover. There are signs of recovery visible and these markets shall, eventually, recover. The only question is when. Soon, we hope. But surely,

Hum Honge Kaamyab, Hum Honge Kaamyab,

Hom Honge Kaamyab ........... Ek Din.

Ho Ho Man Mein Hai Vishwas, Poora Hai Vishwas,

Ki Hom Honge Kaamyab ........... Ek Din.

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 market 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!!!

Update: This article was also published on the business and investing page of Reuters.

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Nifty Fails to Sustain Higher Levels

A new feature has been introduced with effect from 3 Mar 2008. Now you can listen to an audio of all the posts written here. The link to the audio is at the end of this post. Click on ‘hear this post’ and a new window will open which will create an mp3 file and then read the post for you. Just make sure that your speakers/headphones are on. Now you can listen to the posts even in your car while driving to work, provided you have opened the page on your laptop. The biggest advantage is to the people visiting the site from their mobile phones. They can just click the link to the audio and the post will be read out to you. Great, isn't it?

Both the Dow Jones and the Nasdaq ended on firm territory on Thursday while European Markets remained a little subdued. The Dow Jones Industrial Average (DJIA) now stands at a very crucial resistance near 12400. If it is able to go past this level, we can expect it to go upto between 12750-12850 levels where again it will find resistance. Beyond these levels, a double bottom would be confirmed which should take it well past 13500. The Relative Strength Index (RSI) has consistently being making lower highs since May last year and a move past 12400 should be able to break that jinx. With improvement in the DJIA, we can expect some sanity to return in our markets too.

Seen above is the daily chart of Nifty. Those of us who can study charts will know that this chart does not present a very rosy picture. On the other hand, it is still looking very gloomy. The Nifty is continuing to make lower highs and lower lows (which suggests that the trend is bearish), it continues to trade well below the 200 day moving average for a couple of weeks now and, in the process, it has broken the 21 month old trendline (brown line) too. On Wednesday, it did try to go past the trendline but was pushed back down, which was expected, and which is why I had recommended to use all rallies to exit long positions. Today also, it looks the same.

But there are a few positives also visible on the chart today. The first being the fact that the Nifty is finding support near our first dashed brown line between 4480 and 4500. And secondly, the RSI is refusing to go below 32 after the January fall despite the Nifty making lower lows each time. As suggested in earlier newsletters, the break of this support near 4480 will push the Nifty to the next dashed brown line near 4100. As of now, that seems to be a likely possibility. A move above 4750 will change the short term trend of the Nifty to up while the intermediate trend will change to up on a move above 5020. We should consider buying only after the short term trend has changed to up. Till that happens, use rallies to exit long positions.

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 market 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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