Volatile Markets Expected

Today the Nifty broke through our trendline (shown in the chart below) in the first 30 minutes itself and since then it was a steady decline for the Nifty, though it became a lot steeper in the last two hours. Once a trendline is broken, doesn’t matter which side it breaks out on, a pullback is always expected. This seems to be a pullback to the baseline, though the sharp decline in the last 2 hours says otherwise. Well, we have to follow the market. If we go against it, we will end up in a loss. So, we will wait to see what the Nifty decides to do. For now, since the trendline has not been broken on the downside, we will assume this fall to be a pullback only and we shall assume that we remain in a short term uptrend. We shall be proved wrong if the Nifty were to go below 5250. The positive thing in the chart is that there was a positive divergence between the price and the RSI (price coming down but RSI going up) visible (marked by the brown lines and blue arrows) and it suggests that the trend should reverse if a trendline is broken. That trendline was broken today so we would expect the trend to reverse now. But, as mentioned, the markets are supreme. We have no choice but to follow them.

Depending on how the US markets behave tonight and how the Asian markets open tomorrow; our markets will take a cue from them. Weak US and Asian markets will make our markets open weak but in an hour or so, we could be back focusing on our own markets rather than getting worried about other world markets.

Tomorrow is the last Thursday of the month, which means it is the F&O expiry date tomorrow. This means there will be extra volatility in the markets and it is better to stay away from them. Markets may remain choppy tomorrow. On Friday, we have the budget, another high volatility day. A clear trend will be visible in the markets only in the first week of March. Till then stay away.

Day traders may like to take advantage of the extra volatility. But keep close stop losses because if one gets caught on the wrong side of the market, it could be extremely dangerous because of the high volatility in the markets.

No stocks will be discussed today and tomorrow. Look forward to Monday’s newsletter.

Happy investing!!! Read the Full Post Here

Nifty Remains Range Bound

Today was a very boring day for Nifty traders. The Nifty opened at 5200 and soon shot up to 5250. Thereafter, it was just 30 points up and 30 points down from there. In the last 30 minutes, it went up to 5280 but then lost all its gains and finally ended the day at 5249. As seen on this 30 minutes chart, the Nifty now is at a very crucial resistance line at 5280-5290. Once it goes above 5300, we should be looking at a target of somewhere near 5900. That will, surely, bring us back into an intermediate/medium term uptrend.


Jindal Stainless is showing some support near 145 and is now near its short term resistance line. On a breach of this resistance at 161, it is showing a target of between 188 and 189, on its daily charts. This is a short term trade and we should be able to achieve this target in 15-20 days. The reader can keep a stop of 145 as long as she is in the trade. Of course, after such a major breakdown, it could go well above its target and it may, I repeat, may make sense to continue holding on to it. But once a trader/investor enters a trade, she should always have an exit strategy in mind. The exit strategy should always be that the trade is to be closed, no matter what, when the target level or the stop loss level is hit. But if a stock is still looking strong near its target, then one should modify the exit strategy a little bit. Modifying a strategy DOES NOT mean changing the target price altogether. You can modify it in such a way that you close only 50% of your position near that target.

Omaxe has been in a contracting range for more than a month now. Now it has reached a point where it has to break out of the range, either upwards or downwards. The direction is unknown yet. The range, at this point, is between 252 and 269. Whichever direction it breaks out towards, the other level could be used as a stop loss. The target, if it breaks upwards is near 390 and the downside target is near 135. For a stock which has already corrected 68%, it is unlikely that it will lose another 40% from here. So, the chances of it going up are more than it coming down. So, one can buy above 270 with a stop loss of 250 for a target of 385-390.

Attached above is the daily chart of Sterlite Industries which shows that it is now near its resistance line. A positive for this stock is that the RSI has broken through its months long trendline for the first time. A breach of this trendline could take the stock up to a level of near 1000. One should consider buying it above 860 with a stop loss of 755.

There are some other stocks also showing good strength like Divis Labs, Ranbaxy, Infosys, TCS, GMR Infrastructure, Hindalco but they have already been discussed in our earlier newsletters.

Happy investing!!!

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Many Blue Chips Showing Strength

Looking at the last 7 days chart of the Nifty on this daily chart, we find that there is one blue candle, one red candle, one blue, one red and so on. This, along with the narrow range trading, indicates confusion and indecisiveness in the market. The green line just below today’s candle is the 200-day moving average of the Nifty. A close below that would be dangerous. Fortunately, it recovered before it reached there and closed the day about 80 points in the green. While the Nifty is expected to remain in this broad range of 4800-5500, there is support at the 200 day MA at 5030 and resistance, near the previous pivot high formed last week, at 5368.

On the daily chart of Larsen & Toubro, the stock has made a higher low yesterday and is now near its resistance line. With a stop loss of 3385, it seems to be a good buy if it crosses 3520 and it looks good for a target near 4000. Notice the RSI also turning back upwards after touching 40.

Ranbaxy was recommended in the newsletter of 22nd Feb. Unfortunately, on that day because of weak markets it didn’t cross our recommended level of 425. Today again it has knocked against its resistance line. The levels, now too, remain the same. Buy above 425 for a target of 500. However, we have now modified the stop loss from 340 to 390.

Look at this daily chart of Reliance Communications. Two doji days (days having open and close at almost the same level) now with today’s doji with a long lower shadow should be a good bet. Also notice the positive divergence (price going down but RSI going up) between the price and the RSI. Also the RSI fails to breach the 40 level this time around. All these are positives for the stock. Look to buy above 600 with a stop loss of 550 for target prices of around 700 and then 800.

This is the daily chart of State Bank of India. The trendline seen on this chart has been drawn from the lows made in April 2007 at a level of 915. It has been 10 months now and the stock is still finding support near this line. Touching of the trendline today and a doji day with long lower shadows with RSI above 40 are positives for this public sector bank. One could buy it above today’s high of 2140 for a target near 2600. There may be some resistance near 2280 so be careful around those levels. Keep a stop loss of 2050 for this purpose.

We again have a chart with a trendline drawn from the lows formed in April 2007 (of course, that time it had a face value of Rs.10/- as compared to the Rs.2/- now). The price of Suzlon Energy today touched this trendline and is currently trading below its 200 day moving average at 319, with today being the 4th consecutive close below it. Stay away from it for the time being. All long positions should be closed on a close below 290.

Happy investing!!!

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Penny Wise, Pound Foolish

Conventional wisdom suggests that when the markets have a correction and a dip, one should invest for the long term to take advantage of low valuations resulting from the correction in prices. This is a time tested policy and has stood a lot of investors in good stead.

However, those of you, who have been following the market closely, particularly over the past few weeks, will agree that the markets are passing through an uncertain phase with the market trading in a very wide range of Nifty fluctuating between 4600 and 5500. With the US markets showing no indications of an improvement in the near term, it can be safely assumed that we shall also pass through an extended phase of uncertainty where the Nifty may continue to fluctuate in this wide range for many weeks, if not months. A very wide range of 900 points on the Nifty gives an opportunity to us to take advantage of this situation.

If the above is believed to be true, I would stick my neck out to suggest that even Investors, those who buy stocks with a long term horizon, should change their investment strategy, in the near term at least, and take advantage of the volatility in the market. I would recommend that the strategy ought to be to ‘buy a dip and sell a rally’. That is, one should look for opportunities for making a quick entry, and a quicker exit once you make a profit. Investors ought to buy market leaders whenever there is a dip and rather than get ‘married’ to the stock, look forward to booking their gains whenever there is a rally and then wait patiently for a dip again to reinvest. Before doing this, you should put in some effort to find the range for each of the shares you wish to invest in to time your entries and exits correctly. For the readers who find it difficult to determine this range, we shall be most willing to help them out. So feel free to send us your queries. Why I am suggesting purchase of market leaders is because whenever the sentiment changes for the better, and it surely will do so eventually, it is these large cap market leaders which will be the first to rally. I am quite sure that most investors will be able to get opportunities to book profits in this way at least a couple of times, if not more, before the market finds a trend for itself. This will lead to a reduction in the long term cost of holding for these shares,

What can go wrong with this strategy? The market may not come down after we have sold our stock and we lose an opportunity to get much larger gains that we can expect if we buy and hold for a long period of time. Yes, it certainly can happen. We should keep a close watch on the short term and intermediate term trends and the moment both of them come in sync with the Primary ( Long term ) trend, which is up, one must buy, whatever you wish to, for the long term. At least I am quite confident that we should be able to get two three occasions to book our profits by behaving like a trader before the three trends start moving in the same direction. This policy will also protect you from losses should the primary trend also turn bearish in future. And, of course, when you start behaving like a trader you must have your stop losses and exit plans in situ to avoid unpleasant situations.

Did I hear somebody say that the policy I am recommending is being “penny wise and pound foolish?” Well today’s piece is written specifically with such skeptics in mind.

Contributed by Col. Mahesh Sharma Read the Full Post Here

Effects of US Recession on India

In Monday’s newsletter, we had attached a chart showing the performance of the Nifty with respect to other major world indices, which showed that the Nifty has outperformed all other major world markets in the past and is likely to do so in the future. That was the technical view-point of why the FIIs should invest in India.

Today, in this newseletter, we will discuss the fundamental factors of why it should come to India. With the events of the last few months, it has been more than evident that the largest, if not the strongest, economy in the world, i.e. that of the United States is heading towards a recession. But how does one say that? The answer is the GDP (Gross Domestic Product). A GDP, in simple terms, is used to gauge the health of an economy. Let us compare India’s GDP with the other world economies. According to 2007 data, measured at $796.1 billion, India’s economy is the tenth largest economy in the world. United States has the largest economy with a size of $13.22 trillion. The other countries between the US and the India in decreasing order of size are Japan, Germany, China, UK, France, Italy, Canada and Spain. Now let us look at the GDP growth rates. Again, according to 2007 data, India stands at number 17 with a growth rate of 8.5%, China stands at number 9 with a growth of 10.5%. Azerbaijan has shown the maximum growth of 32.5% in 2007 but has a size of only $14.05 billion. Out of the top ten countries by size the third country, after China and India, is Spain showing a growth of only 3.6%. United States stands at number 63 with a growth of only 3.4%.

You may ask – so what? Just because India is now showing 8.5% growth does not mean that it will be the same in the years to come. Well, you may be right. It may fall down. The signals are already there. But to what level and because of what reasons? Lets consider the various components of GDP. In layman’s language, GDP is the sum of the total consumption, investments, government spending and net exports. Let us look at each one of them in detail.

Consumption is the sum of expenditures by households on durable goods, non-durable goods, and services. Investment is the sum of expenditures on capital equipment, inventories, and structures. Government spending is the sum of expenditures by all government bodies on goods, services and infrastructure. And Net export is the difference between total exports and total imports.

Now that we know the components of a GDP, simple logic tells us that the GDP would go down only if either consumer spending, or companies’ investments, or government spending or exports, or all of them, go down or if the imports go up. Now let us look at the demographics of India. According to a survey done recently, about 65% of the population is between the age of 15-64. Another source also says that the working population of India is expected to remain between 60-65% till 2050 as compared to the ageing population of the western world. A higher percentage of working population means increased demands, which means increased production, which means increase in the number of jobs, which means increased salaries, which means increase in disposable income and which means increase in consumer spending. This explains that both the consumer spending and investments are set to increase in the years to come. With increase in salaries and increase in spending, it would mean increase in tax collections which would, in turn, be spent towards developing the country’s infrastructure. And with the Commonwealth Games approaching in 2010, infrastructure is now set to increase at a much faster pace than usual.

The only concern is that with recession in the US, will it affect our exports? If the exports do go down, it will have a negative impact on the GDP. But how much would a recession in US affect us? Our main concern right now is that it will affect us because in this world of international trade, we are dependent on the US also for our exports and a recession there could lead them to cut their imports and hence our exports. But how much are we really dependent on them?

For that we have to see the export figures to US. In the year 2006-07, our exports of goods were roughly 14% of our GDP while total exports of goods and services stood at 27% of the GDP. Out of the 14% (of GDP) worth of goods exported by India, 14.9% (of total exports) was exports to US, which, in turn, means that as far as export of goods is concerned, only 2.09% of our GDP is dependent on them. If 27% is total exports out of which 14% is for goods that means 13% of services were exported. Unfortunately, countrywise export data of services is not available but we do know that out of a total export figure of $119 billion, $54.6 billion (45.88%) accounted for export of software and BPO services. Since the major exports of services to US is in the form of software and BPO only, it means that exports of services to US accounts for roughly 6% (45.88% of 13%) of our GDP. So, our total exports to US is only about 8% of our GDP. Now, how does a recession in US affect us? If they are in a recession, will they stop all their imports? Obviously not. They would, at the most, reduce it to save their spendings. To reduce their costs, they may cut down on imports of manufactured goods. Another way of reducing their spendings would be to outsource some of their jobs. Since both China and India specialize in providing skilled labour at cheaper rates than America, and since India is an English speaking country, most of those outsourcing jobs should come to India. So, while the US imports of goods may go down, the import of services may actually increase. Even if they reduce their imports of goods from India by a hefty 25%, it would still affect our GDP by only between 1 and 2%. This means that the growth rate of our GDP would still be much much higher than the top ten countries of the world (except China).

The above facts coupled with the interest rate differential between India and the US leave no choice with the FIIs than to invest in India.

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Pharma and IT Sector Good to Invest Into

The Nifty opened on a positive note today, found resistance immediately near 5240, came down in the mid afternoon session to reach yesterday’s lows of 5120 and in late trade again showed a good recovery to close at a level of 5210.

What we are seeing here is a 30-minutes chart of Nifty along with its RSI (Relative Strength Index) at the bottom. This chart has been shown with a number of trendlines, arrows and numbers. Try not to get confused with so many of them. If you want, you can right click on the chart with your mouse and select – “open link in new window”. That will open the chart as a larger image in a new window and toggle between the two windows to read in one window and to see the chart in the second. Let us look at the most recent set of arrows and trendlines (marked by 1). In this you can see that the price has made a bottom at the same level as yesterday whereas, correspondingly, the RSI has made a higher bottom. This is known as a bullish divergence or a positive divergence. This gives an early indication that the downtrend may soon be over. The actual confirmation comes when the price breaks the trendline, which it did in the last 30 minutes. This suggests that we should see the price going up tomorrow onwards. How long this new uptrend will last, only time will tell.

Let us go a little earlier in the chart, say the period between 14th and 19th Feb (marked by 2). We can see in this that the price continued to make higher bottoms while the RSI, at the same time, continued to make newer lows. This is known as a bearish divergence or a negative divergence between the price and the RSI. This means that this uptrend may soon be broken but a confirmation will come only when the price breaks the trendline. So even though the divergence came on 15th and 18th but it was not confirmed until late in the afternoon on 19th. Going a little earlier in the chart between 11th and 13th, another bullish divergence is visible at the place marked 3.

A technical analyst should realize that visibility of a divergence is not a signal to buy or sell, it is only an indication that the trend may change. A divergence has the same relationship with price that dark clouds have with rain. Visibility of dark clouds is only an indication that rain will come but it is not certain that it will rain till it actually does rain. For all one knows, the dark clouds may be blown away by the wind before it rains. Similarly, a divergence is an indication that the trend may change but till the price actually breaches a trendline, there is no certainty that it will. Divergences also do get ‘blown away’ occasionally. Fortunately, today it has made it certain that we may see a new uptrend now. But, since we are looking at 30 minutes charts, the trend may last for a very short period of time.

Divis Labs is also showing a bullish divergence with the RSI on its daily charts. But a confirmation from the price is yet to come. One could consider buying Divis Labs above 1450 with a stop loss of 1310 for a target of near 1650.

GMR Infrastructure seems to have broken through its resistance line while the RSI has been making tops at virtually the same levels. This seems to be a good time to buy the stock of this infrastructure company. One may look to buy above 185 with a stop loss of 164 for a target of 220.

Hindalco Industries has broken out of a W pattern (alos commonly known as a double bottom pattern, apparently, with low volumes. But these low volumes could also be attributed to the weak sentiments in the markets. Buying above 191 with a stop loss of 174 may give us a target near 220.

Infosys Technologies, and all other software services stocks have shown some good recovery in the last few days, which could be attributed to the fact, that the rupee has gone down versus the dollar. Infosys is still looking good on the charts. It seems to have broken out of a downtrending pattern and looks all set to go up. A noticeable fact is the, not so encouraging, volumes. But, a trade can be taken because of the low (comparatively) risk-reward ratio. Buy above 1650 with a stop loss below 1470 for a target near 2000.

Ranbaxy is also showing a bullish pattern. We have already mentioned Divis Labs in this newsletter which is looking good to buy. Other pharma stocks like Aurobindo Pharma and Dr. Reddy are also showing strength but because no particular buy signal has come in them, therefore, they are not discussed here. This suggests that the whole pharma pack is looking strong. The thing to consider here is that since the whole sector is looking attractive, hence buy signals in this sector may be more reliable than the others. Ranbaxy, if it is able to cross 425 is looking very attractive and is showing a target of around 500. The only negative in this pharma giant is that it has a very wide stop, at least at the moment it does. The stop loss is at 340 right now but if the price were to cross 450, we could increase the stop to 415-420. But, be sure that you buy only if it were to go above 425.

Steel Authority of India (SAIL) is very close to its resistance line. It may find resistance here, or it may breach the resistance. If it does breach it, then it should be a good opportunity to buy. One may buy it if it goes above 240 for a target of 290. This also has a problem of a wide stop of 180, to start with, but risk averse investors may keep a stop below 219 to protect heavy losses. Indications are that it should be able to breach its resistance this time. Yet, the reader has to ensure that she buys it only when it crosses 240. Ignore all price movements in the first 30 minutes.

I’ve never seen a more interesting chart than this. Sasken Communication Technologies. Notice the decline with very low volumes in mid December and mid January. Notice the volumes now. Notice the series of doji candles (doji candles are those candles having the open and close at the same level) in the last 10 days. What does it indicate? Accumulation? Distribution? It is down 70% from its top and still showing dojis? There is something serious going on in this stock. I would say that, at the risk of putting my foot in my mouth, it is a wonderful stock to buy at current levels. The stop loss, technically, is below 119 but one can keep a wider stop also to suit one’s risk appetite. Worth a mention here is that like Infosys, even Satyam Computers, Tata Consultancy and Wipro are also looking good, though they are not discussed in this edition of the newsletter. Due to space and time constraints, they are not discussed today but one can pick them up at current levels and we will discuss them tomorrow.

Happy investing!!!

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Consolidation to Continue

For over a month now, the Nifty has been consolidating within this range of 4800-5500. Till the Nifty moves out of this range, a clear trend will be difficult to predict. But it has already been predicted that after such a heavy downfall, a long consolidation was to be expected. After today’s downward move, it can be observed that the Nifty has made a lower high as against the previous high that it made in the beginning of the month. The Nifty has three supports visible on its daily charts. The first one is the support around 5100 levels, where it has found support on 5 occasions within this range itself. The next is the support provided by the 200 day moving average at 5015, which happens to be quite a strong support. And last, but not the least, is the support at the lower end of the range between 4800-4900. On the upperside, resistance lies between 5400 and 5500. It is noticeable that the Nifty has again turned down after a doji day.

Shown above is the relative performance of the top 9 indices of the world starting from August last year. The topmost line in green is that of Nifty and the bottommost line is that of Nikkei. Dow Jones is the black line, which is somewhere in the middle position. It is clear from the chart that despite the heavy correction, it is clear that only the Nifty and the Hang Seng have been clear outperformers as compared to the rest of the world. I have seen the chart on various time frames and have seen that in any chart longer than a 3 month period, the Nifty has been an outperformer. This chart is also available to FIIs all over the world. Not only this, they have better research available which shows that the Nifty has been, and will be, an outperformer as compared to the rest of the world. Imagine, when the sentiment improves, and if you were supposed to invest your money, where would you invest it? Thank you, your answer says it all.

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Uniform Face Values - Will They Be a Reality Soon?

I am out of the office for a few days, which is why for this week I will not be able to post newsletters based on technicals. But I have requested my colleagues in the office to post some interesting stuff on the site so that the readers/regular visitors to my site don't go away disappointed. Not only my colleagues, any of my readers who would like their views/opinions/articles published on this site, I would request them to send an email to me and I will do the needful. But do not forget to add your name and email ID in your email so that you get 'due credit' for your article. Today's article has been sent in to me by Parul. She has collected some fundamental data and has posted her view on them. Please go through them.

Uniform Face Values???

The face value of shares of all listed companies may soon be Re .1/- if the SEBI board accepts a proposal by the Primary markets Advisory committee or the PMAC. The move aims to ensure uniform face values, so that investors can make informed stock comparisons. It could well be the first major policy decision that CB Bhave, the new SEBI Chairman, has to make, something that could change the way the Indian capital markets operate.

Sources say the proposal, if it gets through, will mean that companies that have a face value of more than Re.1/- will have to go in for a stock split. The aim of this move is to ensure uniform face values so that investors can make informed stock comparisons. The move could also result in greater public float of listed companies.

Sources in the PMAC said the ultimate aim is to do away with the face value concept. Stock exchanges abroad do not have the concept of face value, so any fresh listing does not carry either a premium or a discount with it. The PMAC wants SEBI to benchmark its policies to this international best practice. The other important fallout will be that the public float of stocks will go up, something the government has always wanted, though the market capitalization will remain the same.

Punj Lloyd - A Fundamental View

Punj Lloyd Limited (PLL), wholly owned subsidiary of Sembawang Engineers & Constructors Pte. Ltd. (SEC), has bagged a Rs.11.2 billion order from Marina Bay Sands Pte. Ltd. The current order win demonstrates the engineering prowess. In the past, SEC margins were low on account of legacy orders that had margins of around 1-1.5%. This impacted the PLL group i.e. PLL + SEC margins, which fell from 11.2% in FY2006 to 7.6% in FY2007. New order inflows will be positive for the group as rising share of new orders in SEC order backlog will help alleviate SEC margins. PLL’s consolidated EBIDTA (Earnings Before Interest, Depreciation, Taxes and Amortization) margins should also improve to 9.8% in FY2009E against 7.6% in FY2007.

At the Current Market Price (CMP) of Rs 367/-, the stock is trading at a PE Ratio (PER) of 17.7x FY2010E earnings and 8.8x FY2010E EV/EBITDA (EV=Enterprise Value). The core business is valued by average of price targets derived from PER of 25X FY2010E, EV/EBIDTA of 14X FY2010E and 3 Stage DCF(Discounted Cash Flow) Model with terminal growth rate of 4.0% and discount rate of 11.0%. The core business is valued at Rs 176.3 billion or Rs.549/- per share of PLL. New business like ship building, real estate and medicity project is valued at Rs.17.3 billion or Rs 54/- per share of PLL. This gives us a combined value of approximately Rs.600/- per share.

Maruti Suzuki Limited - Losing Ground?

Fundamentally, Maruti Suzuki is a great buy at these levels. All the talk about the company losing ground in wake of the launch of Tata Nano is just inaccurate. If you look at the sales figures of the cheapest car available in the Indian market today, the Maruti 800, the figures show a steady decline in numbers versus the steady rise in sales figures of the Alto and other models. Therefore, people choose not to buy the cheapest car but one that offers good features too. The sales of Tata Nano will only cut into the sales growth of higher priced motorcycles and to some extent that of Maruti 800 only. Maruti Suzuki will continue to outperform in the auto sector with the impending launch of its new models over the next year - not the least is the launch of the Swift platform based replacement for the Esteem. So one should just go ahead and accumulate on every fall - the valuation is very very attractive. Outlook on passenger vehicle segment looks positive fundamentally. With stronger macro economic indicators like GDP growth rate ranging between 7-8% annually, with rising income levels, more product choices being made available to customers by car manufacturers is expected to lead to a healthy domestic offtake of cars, wherein growth rates are likely to be around 13-15% CAGR for the next 3-4 years. But in the short to medium term, expect car manufacturers to face the hit of rising interest rates, whichwould impact the sales volume. The company should be able to retain its leadership in passenger cars market, if not increase, with its strong leadership position in compact car segment which accounts for 70% of overall car market size.

Indian market is expected to remain centered around compact cars due to poor roads, heavy traffic, high petrol prices and affordability issues for at least next three years. Factors like rising consumerism, favorable demographics, affordable financing, excise duty cuts (in the earlier Budget) coupled with wide-spread dealer network, superior customer rating and aggressive marketing with continuous new product launches will strengthen Maruti's position further in domestic car market. At present, the stock looks attractive at 10.5x FY09E & 8.6x FY10E earnings, 6.3x EV/ EBDITA FY09E & 5.1x EV/EBDITA FY10E and 1.1x FY09E MCap/Sales & 0.8x FY10E MCap/Sales. Buy Maruti with target price of Rs 1250 in the long term.

Contributed by: Parul

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Volatility Likely to Continue

The markets continue to be choppy and volatile. Such a situation can continue for weeks. The short term trend has changed to Up. The intermediate trend is Down. The primary or long term trend continues to be Up. In such a scenario of extreme volatility, we have to change our strategies. Even Investors have to behave like Traders.

The strategy clearly has to be to buy on a dip and book your profits on a rally and also follow stop losses. The average historical volatility for Nifty is 30%. Presently it is 60%, almost double its long term average. Since the markets are volatile, the stop losses have to be kept sensibly. Small stop losses are likely to trigger easily. As long as the volatility remains high, one must keep the volumes low to keep a control over losses.

Bonus in Reliance Power

Reliance Power is going to have a meeting on 24 Feb to consider issue of free bonus shares to all shareholders other than promoters. The company had come with an IPO in Jan 2008 wherein it issued shares to Retail investors at Rs.430/- and to QIBs at Rs.450/- per share. The shares were listed in NSE and BSE on 11 Feb and have not seen the price of Rs.450/- ever since. Having created a record by being over-subscribed 72 times the price, after listing it has seen a low of Rs.333 on 13 Feb. The management of the company claims that it is taking this step to look after the interest of its share holders and to compensate them for the short term loss incurred by them.

In actual fact, this is just a ploy to reduce the IPO price, which had been set very aggressively at the time of issue. In a way, it is an admission by the company that the IPO was grossly overpriced. It is being done only to win back the favour of retail public as the ADA Group has plans to raise capital in at least three issues during the year. An adverse public reaction is likely to damage the prospects of the Group raising the requisite capital.

The investors, at large, should learn a lesson from all that has transpired in the Primary market during the past few months that they should not take their investment decisions based on the market hype or the so called ‘grey market premium’, which in any case is, manipulated by the vested interests. The public must understand that the bonus issue does not, in any way, change the market capitalization of the company.

Col. (Retd.) Mahesh Sharma

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Base Building 'On' in Most Stocks

The Nifty, on Friday, remained a little range bound in the first half of the day but after noon, once it was able to cross the day’s highs, it consistently went up. The Nifty now has reasonable resistance at 5350 levels, still about 60 points away from Nifty’s close.

On the way up the Nifty managed to break its resistance level (marked by the blue line) and signified that it was no longer in a downtrend. Not only that, the pattern formed on this 30-minutes chart before the breakout tells us that the target for the Nifty could now be 5750. But there is another very important thing visible here. And that is the presence of the two dojis (open and close near the same price) at the end of the chart (in the red circle). It has been explained in earlier newsletters that dojis represent uncertainty and that they are formed, generally, near short term market tops/market bottoms. If this were to be true, we could see the Nifty coming down tomorrow. Fortunately, support is not too far away and should find support near the blue line, i.e. between 5200-5210.

Balrampur Chini is currently in a base-building phase and once it breaks through the upper trendline, it should be a good time to buy. Unfortunately, in such kind of patterns, the risk reward ratio is 1:1, which means that the stop loss is as far as the target. But to get rewards, one has to take the risk. So, a buy above 93 with a stop loss of 75 should take us to a target near 112-113.

BHEL has broken through one trendline and is currently facing resistance from another one on its daily chart. But if this resistance is crossed too then it should go up to its next resistance line between 2600-2700. Buy above 2315 with a stop loss of 2050.

Sesa Goa is also making a base on its daily charts after a sharp decline and is now standing at its resistance. It has also broken a downtrending line on the RSI. This resistance line (on the price chart), which means above 3250 could give us a target of around 3700. A stop loss of 2800 seems reasonable at the moment. But the important thing is that will Sesa Goa break through its trendline tomorrow? Maybe, it could, but there are two negatives here which are pointing against it. One is the doji made on the chart on the Friday, which suggests that this could be a short term market top and the other is the reasonably low and declining volumes, which accompanied the price increase in the last 4 days.

Tata Steel is near its 5 month old resistance line on its daily chart and prices going above this trendline could be bullish for this steel stock. One could buy it above 830 with a stop loss at 700 for a target of somewhere close to 970.

Happy investing!!!

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