Maybe The RBI Credit Policy Will be The Trigger

Another narrow range day for the Nifty today. Opened with a slight gap up, continued its way down most of the day but showed a smart recovery of about 20 points in the last hour of trading and closed slightly in the green - just 1 point up. As of now it is continuing to trade in the range of 5630 to 5725. The cabinet reshuffle had virtually no effect on the Nifty. Maybe RBI credit policy will act as a trigger for the breakout from the range. Let's see whether it does happen tomorrow or not. The market is expecting the rates to remain unchanged or at the most a 25 basis points cut in the CRR.

As far as our previous recommendations are concerned, some of them have hit our target. Regarding our recommendations on Pantaloon and McDowells, Pantaloons has hit our first target of 177 and we'll have to wait and see whether it goes down to achieve our second target of 166 or not. On McDowells we had given a target of 1050 when it was trading at around 1250. Today it overshot our target too and touched a low of 989 intraday. In our recommendation on Sun TV, our target of 323 was achieved yesterday only but no fresh buying should be done here as it went below the trendline today and our next target for Sun TV is 275. A bounceback to 330-335 is possible in the next 3-5 days. IRB, Havell's, OBC and Ambuja Cement too are following our recommendations.

Attached above is the daily chart of BHEL. BHEL was displaying a bullish trend till now and today on the back of results (a 10% decline in profits), it lost more than 6%. As the trend still remains bullish, maybe, this is a good buying opportunity for us. Some good support is seen on the charts near 223. As seen from the chart, 224 happens to be a key support level (the 61.8% Fibonacci retracement) and the RSI is also close to 40. Tomorrow's movement, after allowing the market to settle down a bit, must be watched and BHEL can be bought on any signs of strength. However, if it continues to go down, next support may come in near 211. On the upside, we'll be looking at a target of 260 initially and then 290.

Attached above is the daily chart of Dabur. As can be seen from the chart, Dabur was respecting two trendlines till now and today it "disrespected" one of them and closed much below it. Though, the RSI still hasn't gone below 40 but I would still expect the price to come to the second trendline near 112-115 in the coming days. And maybe it can see a small recovery to 128-130 once again before starting its downfall again.

Attached above is the weekly chart of Gujarat Fluoro. And as can be seen on the chart, it has made a pattern which is not exactly a head and shoulders pattern but something on those lines. Though, it looks as if the price has broken through but I wouldn't confirm it this soon. I will prefer to see it go down to 310-315 before I would confirm that it has broken through the trendline. On a breakthrough of the trendline I expect a target between 170-180. But since this pattern is on a weekly chart, it will take a much longer time to go to that level. It could be as much as 8-9 months. So, patience is required.

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Global Meltdown 'Melts' Nifty

It’s the scenario of a global meltdown today. It’s like a ship, much bigger than Titanic, which is as big as the whole world, and it is going under. Everything seems to be sinking. Let’s have a quick look at the world markets. The Nifty closed with a loss of 215 points for the day while the BSE Sensex tanked 724 points. Asian markets were down quite a bit today (Monday) with the Japanese Nikkei shaving off 4.25%, Hang Seng 4.97%, Chinese markets losing 5.23%, Singapore Straits 5.6% and Jakarta leading the pack with a loss of 10.03%. The situation in the European markets was no better with the London FTSE losing 5.77%, German DAX losing 7.07% while the French CAC lost 9.04%. As far as America is concerned, at the time of writing, Dow Jones was trading 559 points in the red (5.41%), the Nasdaq was losing 139 points (7.13%) while the S&P500 had lost 71 points or 6.43%. On the commodities front, Crude was losing 4.92% today, copper 7.62%, most agricultural commodities losing 6-7% while Gold being the ‘safe haven’ for investors was up 4.13%.

As far as the technical analysis of our charts is concerned, there seems to be no hope for the Nifty, even though there was some good news for the Indian markets. The 40% cap enforced by SEBI in Oct 2007 on Assets Under Custody through Participatory Notes (P-Notes) has now been done away with. So, now there is no restriction on P-Notes. Moreover, the RBI has slashed the CRR by 50 basis points. Both these decisions have been taken with a view to increase increase liquidity in the markets. But one wonders how much will this help when the Nifty has broken the major support level of 3800 and is even below the next support of 3640.

Seen above is the weekly chart of the Nifty showing the movement in the last two years. The portion of the chart from Mar 2007 to May 2008 has been marked with a bearish head and shoulders pattern with the neckline as shown by the green dashed line. The target for this head and shoulders pattern is 2600. It seems that the Nifty today has confirmed another, and larger, head and shoulders pattern formed between June 2007 and today. The neckline for this pattern has been shown as the solid green line. The target for this new pattern is half of the last pattern which roughly works out close to 1300 levels on the Nifty. Though, nothing is ever certain with the markets, I can say with reasonable certainty, and accuracy, that this target would not be achieved. And I sincerely hope, for the good of the nation and so many investors, that the markets do not prove me wrong here. Shown in the bottom portion of the chart is the Relative Strength Index (RSI), which continues on its way down and is not even showing a divergence, which might give us some glimmer of hope.

Some immediate support levels for the Nifty are at 3554 (minor), 3130 (reasonable) and 2600 (strong). The Nifty may go on to achieve one of these levels or can find support somewhere in between. Let us hope that this support level comes as soon as possible. But, if things do not change very soon, I’m afraid to say that we’re going to have a lousy Diwali.

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Nifty Falls, Ignores Island Reversal Pattern

The Nifty opened weak today, as was expected, because of the weak American and Asian markets. The Dow Jones was down 372 points overnight while all Asian markets, except Nikkei, were trading in the red with Hang Seng leading the pack, which finally closed with a loss of 759 points, down 3.87%. Followed by a weak opening, the Nifty did try to recover but the happiness lasting only about an hour or so, after which the index started its decline. Another attempt at recovery came shortly after noon but that too didn’t last long and from there it was a steady decline for the Nifty through the day. The island reversal pattern seen on the Nifty two days back was completely ignored today.

Seen above is the tick by tick chart of the Nifty. As seen from the chart, the Nifty, early in the morning, after going to 4150 started going up, made a top near 4190, and came down to 4171.35. Then a small recovery took it past its highs of the day, went up to 4224.60 came down to 4171.35 again, climbed to 4203.30 and finally broke through 4171.35, thus completing a bearish head and shoulders pattern. With the top of the head at 4224.60 and the neckline at 4171.35, the target was 53.25 points (4224.60-4171.35) below 4171.35. This gave us a target level of 4118.10 (4171.35-53.25) on the Nifty. So, we saw a bearish head and shoulders pattern being formed, being confirmed and the target achieved, all in one day. And we can see that after this head and shoulders pattern target was achieved, there was an immediate bounce in the price from that level. This case was more like a case of a perfect head and shoulders pattern. In most cases, either the neckline is not straight, or the shoulders are not perfect or the target is not achieved or the price overshoots the target. But then, life is never perfect. One has to live it the way it is offered to us and make the best of it.

Well, that was the intra day chart for today only, but what is the forecast for tomorrow or the days after that? To try and forecast what the market would do is like trying and forecasting whether the next toss of a coin would be a heads or a tail. The market remains as unpredictable as ever and most of the times move against our wishes/forecast. But we also know that when it does move in our favour, most of the times we get a move big enough to wipe off most of our losses. That is where technical analysis comes in handy, where 7 trades out of 10 turn out to be loss making trades, but the remaining three trades are big enough to wipe the 7 losses and giving us a net profit. Technical Analysis only helps us increase the probability of making a profit. One of my previous posts title “The Probability of Profitability” very well explains this. Well, and to do that we have to analyse to see what our analysis says.

Attached above is the 30 minutes chart of the Nifty, which gives us a slightly longer term view than what the intra day chart gives us. Notice that in this chart, the bearish head and shoulders pattern, which was so clear in the tick by tick chart, is not visible here. Last week we had seen the Nifty slip into a narrow range between 3950 and 4100. This range has been marked by a trend channel/rectangle. Notice that the upper end of the rectangle lies somewhere between 4090 and 4100 and not exactly 4100. Also shown in this chart is the Moving Averages Convergence Divergence (MACD) and the upper line of the rectangle extended till date. This extended line tells us that there is support available between 4090 and 4100. The MACD, which had given a sell signal yesterday, reaffirmed it today by going below the equilibrium line at 0. Notice that there is a blue coloured trendline here too which shows that there maybe support available for the MACD at current levels, which, if broken, would have bearish implications. There are also Fibonacci retracement levels drawn on the chart for the two day rise from 3800 to 4300. These Fibonacci levels tell us that the 38.2% level is still intact may (or may not) provide support at 4112. If this is breached, the next Fibonacci levels of support are at 4050 and 3995, being the 50% and the 61.8% retracement levels, respectively. For now, we can just wait and watch, which of these levels does the Nifty feel worthy enough to respect.

As far as the international markets are concerned, the London FTSE and French CAC closed with a loss of about 2% while the German DAX lost 1% of its value. American markets are more or less flat at the moment while the crude has come off its yesterday's highs and was today in the vicinity of $106 a barrel.

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Head and Shoulders Confirmed, Pullback to 4200 Possible

First of all I would like to apologise to my readers for not being able to post my comments on the markets yesterday. Though, I love writing and sharing my technical views with my readers, but there are days when I have meetings with clients in the evening and sometimes over dinner and those days it becomes difficult for me to post my views. Anyways, I am back today.

Saturday evening, Delhi was rocked by serial bomb blasts. By opening on Monday morning there was news that Lehman Brothers had filed for bankruptcy and that Merrill Lynch was being sold out to Bank of America. The US government confirmed today that Lehman Brothers would not be bailed out. Insurance giant, American International Group (AIG), has asked the Fed for a loan of $40 billion and it is uncertain as yet whether it would help or not. With such news floating around in the market, the markets were bound to go down and the trading range between 4200-4650 was finally broken, but on the downside.

As of today, the London FTSE closed 120 points down losing 2.3%, the German DAX lost 1.12% while the French CAC was virtually unaffected losing only 0.81%. The Asian markets were much worse today (Tuesday) with the Hong Kong Hang Seng losing 5.44%, the Japanese Nikkei 4.95%, the Shanghai index 4.47% and the Korean Kospi losing 4.6%. Compared to them, the feat which the Nifty accomplished was mind boggling. After losing more than 153 points at one point during the day, the Nifty still managed to close in the green, albeit only 2 points.

Attached above is the daily chart of Nifty with the Relative Strength Index (RSI) at the bottom. As seen from the chart, the Nifty has displayed a large head and shoulders pattern formed over a period of almost two months. This bearish head and shoulders pattern gives us a target of 3800 on the charts and it is quite possible that we may achieve that. Looking at the candles formed over the last two days. Both these candles have long lower shadows and today’s candle was a doji with a very long lower shadow. This should be bullish for the market in the short term. And, technically too, in all patterns which witness a breakout, on a number of occasions there are pullbacks. In this head and shoulders breakout too, we may see a pullback which means that the prices may retrace back to 4200 or nearabouts before continuing on their way to 3800.

A few days back I received, on my blog, a comment from Krishnamurthy, who said that he is short in Nifty since 4500 levels because he believed that Nifty had completed the 2nd wave zig zag and that had started the 3rd wave down. Krishnamurthy once sent me an e-book on Elliott Waves and gave me a couple of helpful tips. While I am a novice in Elliott Waves, Krishnamurthy has done a lot of research on it. Krishna, if you are reading this may I please invite you to contribute on my blog from time to time so that not only me, but all my readers too may benefit from your analysis. Please send in your articles to me by e-mail and I’ll post them on to the blog.

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Nifty Displays Bullish Head and Shoulders Pattern

The Nifty opened flat in the morning today and kept trading within a narrow range and was repeatedly finding resistance near 4420 and it wasn’t until 1PM, after the European markets opened, that it started rising again. The European markets closed very well in the day today with gains over 2 and a half percent since yesterday’s close. Even the Dow Jones right now is trading more than 200 points up in the green. Looking at the crude, after touching lows near $118, it is currently trading at $119.50. 118.20 to 118.50 seems to have provided good support to the prices today.

Attached above is the daily chart of Nifty, along with a few trendlines drawn in and the Relative Strength Index (RSI). Let us start with the longest trendline in the chart which has been drawn from the beginning of May till date and which has been shown as a dotted trendline. This trendline was quite comfortably passed through during the day today. A second trendline, which happens to be shown as a solid line green in colour, has been drawn from the beginning of June till date. This also happens to be the neckline of the inverted head and shoulders pattern, which has been marked as S, H and S. A vertical line AB has been drawn from the neckline to the bottom of the head formation. This line has then been superimposed at the point of breakout (??) today. This superimposed line AB gives us a head and shoulders breakout target of 5200. It is not clear whether the head and shoulders pattern has been broken through or not yet. I feel it just fell short of confirming it. We would assume that this pattern has been confirmed if the previous pivot high at 4540 is surpassed, which happens to be another 40 points away. If that does happen the RSI also would cross 60, which would have happened in Nifty the first time in three months and only the second time since January, when the downfall started.

Is there anything that could go wrong? Yes, if it happens to be your bad day, everything could go wrong. Looking at the chart, we can see that the head and shoulders pattern has not been decisively confirmed today, which means that it could very well start coming down from here. Looking at the RSI too, we can see that the resistance at 60 has not been crossed as yet. If the Nifty turns down from here, 60 would not be crossed and it would be bearish for the index. If, on the other hand, the RSI crosses 60, we should be looking at further gains. On the downside, a move below 4140 would cancel this bullish head and shoulders pattern.

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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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Capitulation Like Symptoms Visible

The Nifty yet again opened around the same levels as yesterday’s closing and started moving up. Yet again, at 11AM, it started coming down, and exactly like yesterday found support in the late afternoon session. But today the support was found 160 points below yesterday’s close of 4040 at 3878. The Nifty finally ended the day 144 points down at 3896. Our level of 3882 mentioned in yesterday’s post held very well today.

In the last few days I have been discussing Elliott Wave Counts on the Nifty and so far the counts appeared to be correct and working as per our expectations. To read what we had written in other posts discussing Elliott waves, one can go to the end of this post and under the section “Other Posts That May Interest You” read the posts listed under ‘Elliott Waves’. Or, simply click here to read all posts which have discussed Elliott Waves. Briefly, I had mentioned that we are, probably, in the 5th wave down of major corrective wave C. While writing yesterday’s post I got confused and had mentioned that wave 5 cannot be longer than 797.60 points which was the length of the 3rd wave down in the corrective wave C. As per the Elliott Wave principles, the 3rd wave is usually the longest but NEVER the shortest. And I got confused into thinking that if the length of the 5th wave is more than 797.60 then the 3rd wave would become the shortest. What I forgot was that even if wave 5 was longer than that, wave 1 would still be the shortest which measured only 385.05 points. And Sanjay rightly pointed out in the comments here that even if wave 5 exceeded 797.60 points, wave 3 would still not be the shortest. Thank you, Sanjay. Usually, if the 3rd wave is the longest, wave 5 is almost equal to wave 1. In some cases, it could even be 1.618 times, 2.618 times or 4.236 times of wave 1 (and in some of these cases wave 5 could then become the longest). This seems to be a case where wave 5 will be the longest. 1.618 times of 385.05 would be 623 points and the 5th wave is already longer than that. The next target for the end of wave 5 would be 2.618 times of wave 1 (385.05 points) which is 1008.05 points which works out to a target of 3671.70. God save us if it extends to 4.236 times of the first wave!

I have the daily chart of Nifty uploaded today, as seen above. This chart is the same as yesterday, except being updated with today’s candle. As can be seen from the Bollinger Bands, today’s close was outside the limit of the lower band and this means that the downtrend would continue. Our analysis of the Elliott Wave Counts already suggests that we are looking at a target close to 3672. A quick run through the charts of various large caps and mid caps tells me that almost all stocks, with the exception of those in the pharma and IT sector, seem to have broken through their major supports on the downside. A little bit of capitulation like symptoms were visible today with the prices falling drastically with high volumes. However, there were rumours that an American hedge fund was selling and that the retail investors were not capitulating.

Udayan Mukherjee, the senior stocks analyst for CNBC TV18 said today, that the holdings of the retail segment are mostly in the mid cap and small cap segment and only a small quantity of the retail investors would be invested in the large caps. So, if at all a capitulation by the retail investors were to be seen, it would be mostly in the mid cap and small cap segment and very little in the large cap segment. I, somehow, tend to agree with him. I took a look at the chart of the CNX Midcap 200 Index also today and the picture looks grim, to say the least.

Attached above is the chart of the CNX Midcap 200 Index. The Midcap Index fell by 426 points today, or 7.8% to close at 4992. A look at the chart above tells us that the Midcap Index has confirmed a bearish head and shoulders pattern below 5850, which was formed over a period of 12-14 months. The target for this pattern is close to 1700. If this Index does fall to 1700, it would have fallen 82.6% from its all time high. Incidentally, a smaller bearish head and shoulders pattern is visible on the Relative Strength Index (RSI) chart too. A fall of 82% would really be called capitulation. Please do not interpret my words to say that the midcap Index will fall to 1700. What I said was that it has a target of 1700. The market/this index may capitulate much before it reaches that level.

One very important thing to be noticed and kept in mind is the sentiment indicator. All analysts on TV, Radio and the newspapers are now extremely bearish about the markets. More and more analysts have started giving targets below 10000 on the Sensex. The media (both visual and print), besides business newspapers and business news channels, have started reporting about the massive fall in the markets and the amount of money that the investors have lost. Even knowledgeable people like mutual fund managers and FIIs have turned negative and have started selling. There is pessimism all around. All these factors indicate that we are somewhere very close to a bottom. Long term investments could now be made in small quantities (I’m not saying this as a technical analyst but only as a contrarion investor). Maybe this should cheer some of you out there in all this pessimism.

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Birth of a New Bull Market?

The resignation didn’t come today. Maybe it will come a few days later. Speculation is ripe that in a week’s time the UPA will meet the Left and inform them (rather than reaching a decision) that they are going to the IAEA (International Atomic Energy Agency) to get an approval on the safeguards text. The Left has categorically stated that it ‘will not allow them to go to the IAEA’. And the moment the Government goes, support would be withdrawn. The Government may not be able to garner enough votes to save itself in the event of a no-confidence motion.

I have pasted above the 30 minutes chart of the Nifty. Formed over the last four days can be seen a small bullish head and shoulders formation on the Nifty. This pattern has been confirmed in the last 30 minutes. I, probably, would have expected a larger range candle in the last 30 minutes to accompany a breakout, but with profit booking possible in the last 30 minutes, a concession could be given. The target for this head and shoulders pattern is near 4430. While we are now in a short term uptrend, to confirm an intermediate term uptrend we need the Nifty to go above 4500. While head and shoulders are more reliable on daily and 60 minutes charts, they are not very trustworthy on 30 minutes/real-time and weekly/monthly charts. Had this pattern been visible on a 60 minutes chart, I would have been more convinced but it is not visible there. Another problem that I see with the pattern is that the Relative Strength Index (RSI) is finding constant resistance at 60, as marked by the circle. Its inability to go into the bullish zone may not be a very bullish sign. But we are in a short term uptrend and with the resignation not expected in the next two days, as a day trader I would be looking to go long, rather than short. As a swing trader/investor I would wait for more confirmation to determine whether this rally is just an aberration or is it for real.

A comment was posted by Sanjay in yesterday’s post asking whether we are in corrective wave C of major wave 4 or otherwise. Well, Elliott Waves Analysis is a very specialized topic and while I have a working knowledge of Elliott Waves, I wouldn’t call myself a specialist. But, as far as my knowledge goes I have tried to do an analysis of the wave counts in the cycle/super cycle degree. I would request specialists of EWs to post a comment (if they happen to chance by this post) to tell us all if our analysis seems to be correct or not.

Pasted above is the monthly chart of Nifty along with the wave counts (as I perceive them). Our counts start from the low made in April 2003 at 920, the place marked ‘0’. In my opinion this wave lasted upto Jan 2004 when it made a high of 2014.65. The wave 2 corrected a little more than 61.8% of wave 1 upto a level of 1292.20 in May 2004. Then started the major wave 3 which ended in Feb 2007 after making a high of 4245.30, which turned out to be slightly more than 261.8% of wave 1 (269.77% to be more precise). One can also see another 5 wave structure in wave 3 as marked by the numbers in brown. The corrective wave 4 was rather a small correction. Wave 2 having corrected 61.8% of wave 1, one would have expected wave 4 to correct 38.2% of wave 3 to a level of 3117 but it managed to correct only 23.6% of wave 3 upto 3554.50 in March 2007. Wave 5, according to me, started from there to end in Jan 2008 at 6357.10. With the wave 5 (2802.60 points) almost as long as wave 3 (2953.10 points), yet falling short of the length of wave 3, it is in conformation to the Elliott Wave principles that wave 3 is usually the longest but never the shortest. So from Jan 2008 till now we have been in the corrective waves A,B,C of the complete bull market cycle. And, we have now, probably, seen the end of wave C after the 3-3-5 pattern that it followed while completing waves A, B and C.

From hereon, if our wave counts are correct, then our previous low of 4093.20 made yesterday should not be broken. However, there is only two things that are worrying me and the first one is the fall of the government. While the market has already discounted the fact that the government would fall, yet a sharp knee jerk reaction could come which, probably, could take us below the previous low. The other thing that is worrying me is the fact that we are only 25 weeks or 6 months into the bear market. Usually, Fibonacci numbers hold a lot of importance in the markets and one of my previous posts mentions how the market made important highs/lows after a specific number of weeks and how that number always turned out to be a Fibonacci number. Going by that logic we should see the end of the bull market in 34 weeks which should not happen earlier than the last week of August.

Let us assume that our above logic is wrong and that our wave counts are correct. In that case a new bull market should start now. But do we expect new highs soon? No. A new bull market will always take time to build up. A long period of base-building will happen in the beginning of a bull market. There is a lot of pessimism when the first wave up of the bull wave is seen and people view it as a bear market rally rather than a bull market. The second wave down reinforces the fear that the bear market is continuing. It is only when this wave fails to go below the previous lows and another rally is seen that people realize that it is a new bull market. That is when the volumes come in and people come and buy in large numbers. Exactly the reason why the third wave is the longest wave. Then a correction comes about and the fourth wave down just cools down the overheated market and makes valuations appear a little more reasonable and the fifth wave starts. Now the people again come out in hordes to buy and think that since this is a bull market nothing could go wrong and conditions become euphoric and one knows that it is all about to end soon. Sir John Templeton, a famous stock investor, has rightly said that “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Right now the conditions are pessimistic, there are rumours of a government fall, I am expecting the markets to stay low till end of August and there are analysts predicting the Sensex to come down to 12000 levels and there are a few analysts who are pessimistic enough to expect 9000 on the Sensex and some like me who once predicted the target of Nifty to be 2600. There is a lot of pessimism around and I am wondering if this is the birth of a new bull market?

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How Low Can the Markets Stoop?

The Nifty opened today with a slight negative bias. It remained like that for the first couple of hours or so and then staged a seemingly smart recovery but again found resistance near the highs of the day and in the afternoon, probably, when the European markets started opening that we started coming down, and pretty heavily too. It was a, virtually, one way slide for the Nifty and finally it found support at 4564.50, again very close to our support which we had been predicting between 4500 and 4550. So, yesterday’s doji could not force a turnaround for the markets. The bears weighed much more than the doji.

Attached above is the daily chart of the Nifty. Some interesting things can be seen on this chart. First of all, our first support at 4630, the previous low formed in early April could not hold today and was broken through effortlessly. Secondly, a trendline which has been in place since August 2007 was also broken through today. This could be significant for the market. The only ray of light that we can see in this dark tunnel is the Jan and Mar lows. They could, only could, provide support to the Nifty between 4450 and 4470. Below 4450, we don’t know where the bottom is. It could be 4100 or 4200 or even lower. As of this moment, there is no strength seen in the markets. It is looking all gloomy right now.

I was trying to see if this trendline, which has been marked with the green arrow, was very significant or not. For that I had to see whether it extended back into time or not. And it was then that I came upon a very interesting disheartening chart, the weekly chart of the Nifty. And I was shocked to find that this same trendline had actually started in April 2005 and had provided support to the Nifty 8 times in the last three years. And if this three year long trendline is decisively broken, then it could be very very significant for the market.

This is disheartening in itself that the long term bullish trend could now be broken. But what are the implications? What is the target? Can we ask the market how low it can go? The answer may be visible in this chart itself. Attached below is the same weekly chart of Nifty but zoomed in to show the period from Feb 2007 onwards. Could this be called a bearish head and shoulders pattern? Well, I’m sure it can be. The neckline, of course, is not straight but it doesn’t have to be. There are head and shoulders pattern which work very well with slanting necklines too.

What is disheartening is the fact that the market is virtually shouting from the rooftops to exercise caution. It is telling us that it could stoop down shamelessly to levels which we cannot even think of. But, of course, only after this pattern is decisively broken. The dashed vertical line marked with the arrow shows that the high was close to 6300 when the neckline was near 4300, a difference of 2000 points. And if it is broken and the breakout is considered to be at 4600 then we are looking at a target of …. Hold your breath ….. 2600.

Can this pattern fail? Well, definitely it could. There have been various instances of head and shoulders patterns failing in the past. Uma could vouch for that. She has experienced three head and shoulders patterns failures in Reliance in a single day. Believe me, this is one occasion where I would really hope for this pattern in Nifty to fail. I have a lot of long term positions which I would have to sell in a loss if the Nifty were to go below the previous low at 4450.

After this chart and analysis, I can’t seem to get any more words out of my mouth fingers. All I can say right now is just the three golden words – EXERCISE EXTREME CAUTION.

Happy Investing (if it still happens to be happy)!!!

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Bloodbath on the Streets! 4500 Visible

It was a bad day for the markets today. The Nifty opened flat today and tried on three occasions to go above 4900 but could not sustain itself at those high levels. And by 11:40, it was clear that the Nifty would come down. But what ensued was not what had been anticipated by day traders. The Nifty dropped almost 180 points from the highs of the day. By the end of it all, everything was looking red, the screen was red, the charts showed all red and there was ‘blood on the street’, again red.

However, it wasn’t such a bad day for technical analysts. The swing traders had already anticipated a fall when the Nifty went below 4990. All stop losses for long positions were hit and they were, and still are, merrily sitting on cash, anticipating further downfall. While they do have a target in mind (in my case, it is between 4500 and 4550, and some are even anticipating 3800), they will buy only when the Nifty gives a signal to buy. It may mean missing out on a small portion of the decline/rally but it captures most of the move. There are different theories in technical analysis – one which tells analysts to execute their trades when the target is achieved and another which tells us to buy or sell only when a buy/sell signal is received. I like to follow both theories. For example, in this case, I would look to invest 50% of my money when the target is achieved i.e. when the Nifty goes below 4550 and I would invest the remaining 50% when a buy signal is received, even if it comes at 4800. Both methods have their own pros and cons and I will, probably, talk about them in one of my weekend posts which come under the ‘Lessons on Investing’ category. You can click on “Lessons on Investing” anytime in the label cloud on the right to read such posts.

We have the daily chart of the Nifty with us today. I’ve not included many things on the charts today, so as to keep it very simple for the readers. I am now going to explain what I have included, what my reading is about the chart and why I feel so. I always like to give reasons for my analysis and it is there for everybody to see. As you can see from the chart, there are two trendlines – a downward sloping dashed trendline and an upward sloping solid trendline. The solid trendline shows where the Nifty broke through the support line and showed that a downtrend could start. And the dashed trendline shows the level above which the Nifty should come back in an uptrend. As one can see, and as has been mentioned, a downtrend was signaled when the Nifty came below 4990 and an uptrend would be signaled when the Nifty crosses the dashed trendline which today stands at 5020. Since this line is sloping downwards, this level would keep changing everyday.

The next thing that can be seen from the chart are the two vertical dashed lines marked ‘A’ and ‘B’. Line A measures the distance from the top of the recent uptrend to the trendline on that day. This line A has then been superimposed at the point where the Nifty broke through the trendline and this superimposed line is marked as B. The logic is that the downtrend should be as brief (or as severe) as the uptrend was, though, in some cases there is a possibility of it getting extended too. This superimposed line, thus, gives us a target of 4530 on the Nifty. Since this target is usually not exact, I’m taking it as between 4500 and 4550. You will notice that the same principle is used when calculating the targets for head and shoulders patterns, double/triple tops/bottoms. If you look at the pattern formed from where the solid line starts to where it ends, it does look like a head and shoulders pattern, though, with a very slanted neckline. You will also notice that the Relative Strength Index (RSI) has made a much easier to imagine bearish head and shoulders pattern. Also, one should notice the RSI within the small circle. Since the last week, the RSI was repeatedly finding support at 40, which in itself is not a bullish sign, but is definitely a positive sign which suggests that the market was showing some strength because of which the RSI was finding difficulty going below 40. This strength has been negated today with the RSI advancing to levels lower than 40.

Again, we are not looking at charts of any stocks these days because it is not the time to buy as we are still in an intermediate term downtrend. When the market again shows signs of improvement and there are some buying opportunities available, some of them worth a mention would find their way through on this page.

Happy Investing!!!

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All Set to Go North

If you remember yesterday’s edition, I had mentioned that the Nifty may touch the 1 month long trendline and bounce back from there. That is exactly what happened today. The Nifty stayed within a narrow range throughout the day, but did go low enough to touch not only the trendline but also the support provided by the 23.6% Fibonacci retracement at 5102.25. We had also mentioned that Fibonacci retracements are sometimes pretty accurate. Talk about accuracy and we see that the Nifty made a low of 5101.50, accurate upto 1 point.

Other signs of support being provided are that even though the Nifty came down about 50 points today, the RSI kept hovering around the same levels and did not break 40. Both the price touching the trendline and the RSI finding support at 40 has been marked by blue circles. While the Nifty still did close in the red today but a bounce back from 5101 to 5140 in the last hour is a pretty good indication that the correction may be over.

I am a firm believer in blue chips. Over the years, I have seen lots of ups and downs in the markets and it is always the blue chips which have the power to surpass their previous highs, no matter what they are. I know there are many buyers out there with purchases of L&T above 4500 and Reliance above 3300. They may be sitting on a loss today but with just a little patience I’m sure they will end up in a profit.

Mid caps and small caps have their advantages too. We can take advantage of the momentum and speculation in such stocks. The only problem comes when we are holding these stocks and the market crashes. Technical Analysis gives us clear targets and stop losses. And without fail one of these levels is touched before the other. While we are better at closing positions near the targets (though, greed stops us sometimes), we are horrible at booking losses. This is where the third biggest enemy of ours (after greed and panic), hope, comes into play. It stops us from booking losses because we have seen on a number of occasions when the prices bounce back after our stop loss is hit. But when following technical analysis, discipline is very important. It is only the disciplined trader who wins over the others. But I know 80-90% of traders are not disciplined. And they always get stuck with small caps and mid caps during market crashes. And which is why I try recommending only blue chips. It is only during times like today when there are no blue chips available, that I take the help of other stocks. But it has to warned that discipline is very important when taking such trades.

Larsen and Toubro seems to have broken through its downward sloping trendline and seems to have completed a pullback to the trendline too. The doji day today (open and close at almost the same levels) suggests that the price may start going up tomorrow onwards. It seems to make sense because the RSI too has broken through its trendline and has gone through a pullback after the breakout so it has been moving in tandem with the price. It looks set for a target of around 3600 with a stop below 2890.

Gokaldas Exports, a midcap stock, but a market leader in its industry of readymade apparels, also has made a bullish pattern on the charts. With the volumes not showing anything except the breakout volumes today, can’t say whether it is a true head and shoulders pattern or not but it definitely looks like one. With a stop loss below 204, one can buy it above 235 for a target between 290 and 300.

Happy Investing!!!

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Markets Move in Expected Direction

As expected, the Nifty did come below the upward sloping trendline and is now ready for a (hopefully, small) downmove. As discussed yesterday, the Relative Strength Index (RSI) of the Nifty has also now confirmed the bearish head and shoulders pattern. We can hope for the Nifty to cool down for sometime but upto what level that is a little difficult to say.

Hopefully, we can come to know about the possible levels with the help of the chart below, which is the 60 minutes chart of the Nifty. If we see the chart we can see that this upmove started on 18th March 2008 from a level of 4468.55 and the high was made yesterday at 5298. If we apply the Fibonacci Retracements to it, we can see that the 23.6% retracement is at 5102.25 and the 38.2% retracement at 4981.15. At the moment we are not looking at a move below this level, though, I feel 5100 should be a good level to bounce back from. Of course, conditions may change, circumstances may change.

Note: I still remember about my promise about writing more on Fibonacci in one of the weekend posts. Let me finish with my series on the Mutual Funds first and then I’ll do it. Maybe I’ll do a webinar on it.

No stocks being discussed today. Let us wait for the market retracement to finish and see where support is found.

Okay, and just before I sign off for the day, a small quiz for you. Do you know why we keep using the terms ‘Bulls’ and ‘Bears’ in the stock market? I found the answer at Digital Inspiration, which says that “According to Motley Fool, a bear market earned its name because bears tend to swat at things with their paws in a downward motion (as in "the market's going down"). A bull market, on the other hand, got its name because bulls swing their horns upward when they strike (as in "the market's going up").”

More in the next newsletter.

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Above 5000, Expect a Target of 5500

Before I start with anything else, I must thank all my readers for their continued support. I have now posted 100 posts on this blogspot. It is all because of your continued support and readership that this blog is still a success. I hope that my source of inspiration – my readers – continue to extend their support to me.

Last week was a good week. The markets were closed on Monday on account of Ram Navmi and they were closed again on Friday because of Mahavir Jayanti. So, we were working only on Tuesday, Wednesday and Thursday. I, somehow, liked this three day week. I hope there are many more to come. And now on Sunday evening, Monday blues are already catching up with me.

In terms of market movement too, it turned out to be a good week. The Nifty ended all three days in the green, thus ending the week with a net gain of 180.60 points. Maybe the market too likes three day weeks. We just have to wait and see how Monday goes. If it is a down day then we’ll know that ‘Monday Blues’ don’t affect only the humans.

On account of news, it was a mixed week. The inflation figures that were declared on Thursday this week instead of Friday showed that there was a slight drop. It dropped to 7.14% as compared to the 7.41% the week before that. The RBI Governor decided to increase the CRR (Cash Reserve Ratio) by 50 basis points in two steps to 8%, which is expected to suck out approximately Rs.18500 crores of liquidity. It was surprising that the decision was taken in spite of the marginal drop in inflation but, more than that, surprising was that the decision could not wait upto the credit policy announcement on 29th April. This may suggest some harsher decisions to be announced on April 29th.

While a CRR hike of 50 basis points was expected, no change in the repo rates is expected at the moment. Even though the hike was expected to some extent, the market may still react negatively. There is a view in the market that even though a repo rate hike is not expected at the moment, the CRR hike itself will have an automatic upward pressure on the interest rates. There is also a view that a CRR hike wasn’t necessary and is not likely to contain inflation to a great extent. A major part of the current increase in inflation can be attributed to the increase in the prices of metals, the prices of which are not governed by or within India and the only way to address that issue is to have restrictions in place so that the supply is increased. That explains the reason why steel exports were banned last week.

Let’s get to the technical analysis part of the newsletter. Seen above is the daily chart of Nifty. We can clearly see that at this level, the Nifty is not only finding resistance at the top of its range but also from the downtrending line which has been in place for the last 3 months. This is likely to be a strong resistance. The CRR hike has come about at an inopportune time. This will add to the pressure that the Nifty is facing at 5000 levels. Maybe the time to cross these levels has not yet come. Maybe we’ll have to wait some more.

However, all is not lost yet. Even at the top of the range the Relative Strength Index (RSI) is nowhere close to the overbought levels (above 70), which suggests that there is still some scope left for the prices to go up. Secondly, there is a positive divergence between the price and the RSI visible on the charts. Positive divergence means that while the price is making lower highs, the RSI is continuing to make higher highs. And another positive at this time seems that the RSI has broken through its upward sloping trendline. And not to forget the influence of the global markets which all looked happy and strong on Friday (except China). Maybe, after all, this may be the time to go up. Wait and watch. Above 5000, the Nifty is looking at a target of 5500.

Axis Bank has broken through the downward sloping trendline with a big spurt in volumes. One may consider buying near 800 with a stop loss of 740 for a target between 1000 and 1020.

HDFC Bank has made a pattern of fan lines. In fan lines, in the beginning, a stock finds resistance near a particular trendline. Once that trendline is crossed, it does not change its trend immediately but now starts finding resistance near another downtrending trendline. When this trendline is crossed, it yet again finds another trendline. These are called fan lines. In technical analysis, it is usually said that once a stock crosses the third fan line, it should get a good and a quick move. Notice the spurt in volumes on breakout of the third trendline, which was absent during the previous two breakouts. One may consider buying between 1360 and 1380 with a stop loss of 1270 for a target near 1650.

ITC has a history of finding resistance between 210 and 215. Notice the presence of the two doji candles (having the open and the close at almost the same levels) which signify that this maybe a top to remain for the next few days at least. Also, notice the absence of strength in the RSI because of which it is not able to decisively go through 60. This may be a good time to exit ITC.

Reliance Petro had been stuck inside a narrow range for over 3 months now and has now come out of that range on the upside. Because of the negative news of the CRR hike, a dip to 180 is possible. It might make sense to pick up this stock near 180 with a stop loss of 165 and a target of somewhere between 215 and 220.

Wipro, on its daily charts, seems to have made a bullish head and shoulders pattern. A move above 465 should confirm this pattern. While the stop loss is a little deep at 400, it could be bought above 465 for a target close to 570.

Happy investing!!!

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Nifty Head And Shoulders Confirmed

The Nifty, which was just 57 points away from going through the trendline on Thursday, chose to remain in a narrow range below the trendline before showing a decisive surge in the last hour of the day. This surge took it to a high of 4968 in the last 30 minutes before it closed the candle at 4950.

The chart shown above is just a replica of the chart shown in the previous newsletter (with data for the last day added in and with a few extra lines). As can be clearly seen from the chart, the Nifty has managed to make a perfect head and shoulders pattern and has also managed to go through its neckline. You can see a dashed brown line from the neckline to the bottom of the head (marked by the brown arrow). This is the line that gives us the target. We get the target by copying this line to the place where the Nifty actually broke the neckline (marked by another brown arrow). This gives us a target of somewhere close to 5350 on the Nifty. There may be some zones of resistances inbetween which have again been marked by horizontal dashed brown lines.

Under ideal circumstances, this forming of the head and shoulders pattern and its consequent confirmation (of breaking through the neckline) should take the Nifty to its theoretical target of 5350. However, there are a number of occasions when the patterns fail too. This failure could be in terms of the pattern not getting confirmed, the pattern giving a false confirmation or a failure to reach the price target. For example, the bearish H&S pattern in the RSI formed a few days ago turned out to be a failure. But in this case, we can see that the pattern has been confirmed. We would consider this to be a false confirmation if the Nifty were to go below 4850 and we would consider it a failure if it fails to reach at least 5300.

Dr. Reddy’s Labs, on its 30 minutes chart, has made a bullish head and shoulders pattern and seems to have multiple shoulders. While it is completely possible to have multiple shoulders in a head and shoulders pattern, yet it is not possible to have more than one head because then it would become a double bottom/top or a triple bottom/top instead of remaining a head and shoulders pattern. It currently seems to be going through a pullback. Consider buying it between 580 and 582 or above 594, whichever comes earlier. A target of 635 is possible. A stop loss of 563 is advised.

Infosys also seems to have made a bullish head and shoulders pattern on its 30 minutes chart. It is still unconfirmed but if the price were to go above its neckline at 1550 then it would be confirmed and would give us a target of 1735. Consider buying above 1550 for a stop loss of 1420. The stop is a little wide but we cannot change what the charts say. We either follow them or we don’t.

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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I Think The 'Bulls' Have It, The 'Bulls' Have It

The Nifty moved down in the first half of the day but in the second half it moved up to gain all that it had lost. This volatility may have been because of the F&O expiry today. There were a lot of short positions built up which had to closed/carried forward today. Maybe this upmove was because of that short covering. If it was only because of the short covering that the market went up then it may soon find resistance and come back. That will be known only after the event happens.

We have a very interesting pattern on the 30 minutes chart of the Nifty today. The pattern looks like an inverted head and shoulders pattern which is yet to be confirmed. A move above 4915 (ignoring the movement in the first 30 minutes) should confirm that the bulls are in control of the situation. Not only that, it will also confirm this inverted head and shoulders pattern (incidentally, this H&S pattern gets confirmed above 4900) and that will give us a target of 5350 on the Nifty. Talking of patterns, there are a number of occasions when the patterns fail too. This failure could be in terms of the pattern not getting confirmed, the pattern giving a false confirmation or a failure to reach the price target. The bearish H&S pattern in the RSI formed a few days ago turned out to be a failure.


But, it is quite clear by now that we are in a short term upmove. Signs of an intermediate term upmove will come when Nifty crosses 5370 and will be confirmed when 5550 is crossed. In a short term upmove when bullish patterns come, we should position ourselves on the long side. Well, if this pattern turns out to be a failure, we shall be stopped out. But not attempting an entry now is not advisable because to earn profits one has to take risks too. If you are not willing to risk a failure of the pattern, indirectly you are not willing to make profits. Remember, only those people are rewarded who have the heart to take risks. A strong support comes in at 4750. Below 4750 we may expect a retest of the earlier lows.

ABB has made a double bottom, more commonly known as the ‘W’ pattern and is now ready to move up. It may be worth buying it above 1190 for a target near 1300. One could maintain a stop loss of 1150 for this purpose.


BHEL has a chart exactly like Nifty. An unconfirmed head and shoulders pattern which should get confirmed above 2040. A buy above 2040 with a stop loss of 1920 should give a target of around 2270.

This is the 30 minutes chart of Divis Labs. It seems to have broken through its downtrending line with a slight increase in volumes. At current levels it seems to be a good buy with a stop loss of 1225 for a target of 1430.

On the 30 minute chart of HDFC Ltd. we have yet another similar pattern. As you must have noticed, in all these patterns, the first shoulder and the head are quite well defined whereas the second shoulder is very small, almost like a deformity. Yet the fact remains that it is a shoulder and a head and shoulders pattern has a target which, under normal circumstances, the stock should be able to achieve. Let us, for a moment, assume that we have made a mistake in calling it a head and shoulders pattern and the second shoulder that we are seeing just isn’t there. How do things change then? Well, even if the second shoulder is not there, the neckline will still be the same (even though it will then be called a trendline and not a neckline). And the target? That remains the same too. So, whether, or not, the second shoulder exists, things don’t change for us as long as the neckline (or trendline) is crossed. Consider buying above 2720 with a stop loss of 2600 for a target of 3250.

Till a couple of days back, Ranbaxy was looking like one of the strongest stocks in conditions prevailing at that time. This is a perfect example of how fast things can change. It was making a pattern of a symmetrical triangle, which, technically, can break out in either direction but is normally considered bearish. Once the price has broken out on the downside, things have become clearer and I am afraid, things are looking bad for Ranbaxy. A target of 400 is quite likely, at this point of time. Be careful at around 415. In good conditions, it might reverse from there too.

Fan lines are visible in this 30 minute chart of Reliance Industries. Like always, in the beginning, a stock finds resistance near a particular trendline. Once that trendline is crossed, it does not change its trend immediately but now starts finding resistance near another downtrending trendline. When this trendline is crossed, it yet again finds another trendline. These are called fan lines. In technical analysis, it is usually said that once a stock crosses the third fan line, it should get a good and a quick move. Maybe, Reliance is ready for just that. Consider buying above 2340 with a stop loss of 2240 for a target of 2510 (conservatively) and then 2600.

Apart from these stocks the cement sector is also looking good while the banks seem to be week.

Happy investing!!!

Update: This article was also published on the website of Chicago Sun-Times.

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