A Correction on the Cards

The Nifty closed a quarter of a percent down today losing about 14 points from its previous value. After a reasonably decent opening at 5673, it continued to move up in the morning trades to make a high of 5693 before noon. It remained in the positive till about 2 in the afternoon when the bears took over and pushed it into the negative territory. A last ditch effort to remain in the positive came in the late afternoon trades but could not sustain and the Nifty closed at 5649.50, 14 points in the red.

Attached above is the daily chart of Nifty. Shown on the chart is a trendline sloping upwards connecting the early June, late July and early September lows. Also shown on the chart are two indicators, the MACD and the RSI. Another line is shown connecting the last two most recent highs and a corresponding highs made by the RSI in the same period. As can be seen from the charts, the Nifty made a higher high while the RSI failed to do so in the corresponding period, thus showing a bearish divergence. The RSI has turned downwards and has just penetrated its 9-period signal line, indicating a sell, albeit mild. In the last 20 days, the Nifty has gained almost 500 points without any major correction, a gain of almost 10%. At this stage, a correction is long overdue and signs of weakness are already visible on the charts. A downward correction may take the Nifty back to the upward sloping trendline which could provide support to the Nifty close to the 5400 levels. A steeper downward move could take the Nifty down to the dashed blue line which lies at 5360. This is the line which has provided support to the Nifty once and resistance to it 6 times in the last 9-10 months, a very significant support indeed. So, till we get to that point, it's just a sell on rise market and when we get to 5400 nearabouts it's going to be converted into a buy on dips market.

Seen above is the daily chart of Silver. Silver in the last 45 days itself has shown a rise of almost 12000 points, a rise of almost over 20%. By the looks of it, and using the Elliott Wave Principle, I think we have just entered wave 4 of this uptrend. And if this is a wave 4 then I would expect that the correction would not be very deep (maximum 38%). Secondly, according to the rules, wave 4 should not enter the price territory of wave 1 and the highest point of wave 1 was 56337 and we are a long way from there. A 38.2% retracement, as shown can bring Silver down to 60142. The 23.6% retracement level lies at 62255 and the last 3-4 days, even though have shown a spike below that level but never has Silver closed below it in this correction. This suggests that this 62255 may be a tough level to break. The two consecutive green candles in the last two days show that the price is ready to move up again. An upmove from this point may see Silver finding resistance near 64000 levels and if it crosses that, it can go right past the previous high of 65670 too and my next target for Silver then would be around 68000. But it all depends upon whether the wave 4 correction is complete yet or not. And believe me friends, only time and the markets can tell that, not mortals like you and me. All in all, by the evidence that we've got till now, I would be a seller in Nifty and a buyer in Silver. 

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Nifty Breaks Out, But Wise to be Cautious

The Nifty opened in the green today on the back of strong global cues. The first minute of the day saw the Nifty trading above 4600. Since then, it has been a very dull day for the Nifty since it made a high of 4615 after that and a low of 4580, a range of only 35 points. This narrow range continued upto 3 pm when the Nifty did manage to go 10 points past its high of the day. The positive opening was good for the markets, the fact that it sustained near the highs was also good and closing near the highs was very good. It is the narrow range during the day that worries me since that is not exactly the sign of a breakout.

Seen above is the 60 minutes chart of the Nifty. As suggested yesterday, the index was moving within a falling trend channel, which was looking bullish on the hourly charts since the Nifty went into this channel after a good rally. And a falling wedge or a falling trend channel under such circumstances happens to be a continuation pattern. And as expected, the Nifty did break out of this trend channel on the upside. This pattern breakout gives us a target of 5000 on the hourly charts.

But as already mentioned, it worries me that the Nifty stayed within a very narrow range today after a strong opening. I had mentioned yesterday that a ‘trending’ move may come about and today’s move was definitely not trending in any way. If we look at the tick by tick chart or the 5 minutes chart of the Nifty, we would see that the Nifty stayed sideways all day and didn’t give us a clear trend. What gives us solace was the fact that in the last half an hour it went up above its highs of the day and closed at those levels too.

As for the prediction for tomorrow, there is resistance close by near 4650 while support is also not very far off near 4570. A break out of this range should give us a decisive move. Another worrisome fact is that on the chart, while the Nifty is making higher highs, the Relative Strength Index (RSI), during the same period, is making lower highs, as has been marked by the green arrows. This indicates bearish divergence and a break below 4550 would indicate a trend reversal. So, in spite of the breakthrough today, the Nifty continues to be range bound and it is wise to be cautious. Probably, it is just an attempt to trap the bulls.

My readers would think that even in all this bullishness when the Nifty is moving up everyday, I still talk about bearish things only. Well, I am normally not so bearish but what can I do? This time around this upmove is not giving me the confidence that it normally should. We have seen bullish patterns like a bullish head and shoulders pattern and a falling trend channel pattern but unfortunately the breakouts have been far from perfect. Which is why I continue to stay cautious and that reflects in my writing too. Am I thinking too differently? Tell me readers, what do you think of the markets? What is your view of the markets in the next 2 days, the next 2 weeks, the next 2 months, and in the next 2 years? Let me know how differently I am really thinking. Leave your comments below by clicking on ‘Post a Comment’.

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Crude Oil: Where Will It Stop?

Another weekend. Another day of confusion for me to think of what to write about. That is because markets are closed on weekends and I do not do analysis of Friday’s markets till Sunday night. So, Friday/Saturday posts I have to write about general interest to me and all my readers. Of course, I could write about cricket but that is my interest and I’m not too sure whether it is also the interest of my readers and subscribers too. And, moreover, there is nothing to write about cricket on a day when India lost to Sri Lanka by an innings and 239 runs within four days. Hats off to Muttiah Muralitharan who ended with 11 wickets in the match! No wonder he has the highest number of wickets in Test matches. And I do believe him when he says that he will end up with 1000 Test wickets in his career. Anyways, since cricket is not on my blogging list, let us shift to the next most important thing – crude.

In an earlier post, I had written that there were signs visible that crude was showing signs of topping out. And in fact, that day turned out to be very close to the final high made in crude. We all know that crude finally broke down a few days later and is now more than $20 off its highs. People are talking of support near $120, some say $110 and some even say $80. I do not have access to charts of crude traded on NYMEX (New York Mercantile Exchange). Hence, I do the analysis based on the charts formed by prices on MCX (Multi Commodity Exchange). Since MCX is an Indian exchange prices are quoted in Rupees.

Seen above is the daily chart of crude since the beginning of 2008 along with a trendline, a couple of Fibonacci Retracement analysis and the Relative Strength Index (RSI). Let us start with things in chronological order. My previous post on crude talked about the presence of various dojis (a day on which the opening price and the closing price is the same or is very close to each other), which made the charts look a little bearish, even though the prices were increasing every day. Also seen on the charts is a bearish divergence between the prices and the RSI where the prices are increasing while the RSI is falling (as marked by the thick trendlines and the brown arrows). Next, let us come to the trendline. The prices finally broke through the trendline three days after that analysis but soon recovered. The trendline was decisively broken about a week later when the crude prices even went below the most recent pivot low. Not only that, yesterday it has decisively broken through the pivot low formed in end of May. What remains to be seen is whether this can be qualified as an intermediate term downtrend or not. Technically, the breakthrough the most recent pivot low and an uptrend line gives quite a bright possibility that the trend may have reversed. However, it is not confirmed till we have a pattern of lower highs and lower lows visible. While lower lows are seen on the chart, a lower high has not been formed as yet. So, we would have to wait for a pullback and see whether the previous highs are broken through or a lower high will be made. Another post on my blog, which did the Elliott Waves Analysis of crude may suggest that an intermediate term high may have already been made.

Let us now see where support is likely. For this purpose I have used Fibonacci retracements. I have used two retracements starting from the lows marked at A and B till the high marked at C. As seen from the chart and the price action in the last two days, support is being found near the 38.2% Fibonacci retracement level of AC and near the 50% retracement level of BC. One possibility is that the prices may find support at these levels and may reverse, which could happen to be a short term (or who knows, a long term) reversal. If the prices do break through these levels, support may be found near 4865 where two Fibonacci retracements of 50% (of AC) and 61.8% (of BC) converge. Support may even be found there. Of course, it may decide to continue going further down. Where it eventually finds support can only be decided by the crude itself and no amount of analysis can say with certainty where the ultimate support would be found.

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Support Found, Double Bottom Possible

So, the global cues didn’t seem to matter today. Dow Jones was marginally down, Asia was mixed. Our markets bounced back from the technical support levels and kept going up through the day. Even in the last 30 minutes it just lost about 10 odd points. No big profit booking or selling on rallies seen.

I have got a very interesting 30 minutes chart of the Nifty today. As seen from the thick green lines, the Nifty seems to be making a double bottom pattern which is also known as a ‘W’ pattern with the neckline at 5065 as shown by the dashed green line. This means that this double bottom pattern will be confirmed if, and only if, Nifty were to go above 5065. If this were to happen then the next target on the Nifty will be 5180. But, that is not all that there is to it. There is another downward sloping trendline which might (and probably did today) provide resistance to Nifty. We will assume this resistance to have crossed if the Nifty were to go above 5030 tomorrow. Luckily, it is not very far from the current levels. Just about 20 points away. On the downside support is at the same levels, between 4910 and 4930.

Ranbaxy has been inching upwards within this 50-60 points wide channel since the last three months. An interesting observation that can be made from this chart is that the channel may be rising but the RSI has been making lower highs during the same period, thus showing a negative divergence between the price and the RSI. This is bearish for the stock. I may have mentioned this before but a divergence has the same relationship with the prices that dark clouds have with rain. Dark clouds do not necessarily mean it will rain similarly a divergence does not necessarily mean that the prices will move in the direction expected, provided there is no break in the trendline. But as soon as the trendline is broken the price starts moving in the expected direction. This means that in this case, there is a slight weakness in the stock but it is not a sell, definitely not a short sell, until 465 is broken on the downside. Another negative sign that can be seen in this chart is that this time around, the prices failed to reach the top of the channel. When the prices are moving in a channel, they are expected to touch alternately the top and then the bottom of the channel. A failure to reach either the top or the bottom is known as a return line failure.

This is the daily chart of Tata Steel. It seems to have gone through a double resistance line between 850 and 860. One is a downward sloping trendline almost 7 months long and the other an upward sloping a month longer. The breakout comes with a large blue candle and that makes it all the more simpler for us to identify whether the breakout is genuine or not. I would have been happier with heavier volumes but today’s volumes were just a little better than average. Buy with a stop below 830 for a target near 1050.

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