Infosys Up, Markets Down

Nifty, after breaking through the 4630-4830 range, opened on a high today with but then failed to maintain the heights. As mentioned yesterday, a bout of profit booking set in because market participants are still scared of the markets and are happy with small profits. There is a lot of resistance to be expected between the 4950-5000 zone. On the way down 4830 and then 4630 are good support levels. Buying for the short term could be done at these levels. A move below 4730 will change the short term trend to down.

As suggested in earlier newsletters, a trend in Nifty can develop only if it goes above 5000 or, God forbid, below 4500. As of now it seems as if going below 4500 is a remote possibility. On the daily charts the Nifty has made a doji pattern which means that the open and closing price were very close to each other. This represents indecision. And since dojis are normally found at the end of short term trends, and since today’s doji was found near the top of the range, we may expect the Nifty to come down for a day or two. It may then decide to find support near 4830/4630 and then reverse or continue its way down to 4480. Let us wait and see what it decides to do. A move above 5000 could take it up to 5450-5500.

Let us look at Infosys Technologies. Two days ago it closed at a price of 1421.90. Tuesday morning it came out with its results which were not brilliant but just in line with the expectations. Considering the hostile conditions in which Infosys was operating, such normal results may be called brilliant. Anyways, in the results, it confirmed that in accordance with its guidance of an EPS (Earnings per Share) of 81.5 given last year, it has actually delivered an EPS of 81.56. At a price of 1421.90 and an EPS of 81.56, the Price to Earnings Ratio (P/E) is 17.43x. For next year Infosys has given a guidance of an EPS of 92.30-93.90. And as is its reputation of exceeding its guidance, it may be able to deliver a growth of 17-19%, lets take it as 18%. At 18% and with the base at 81.56, next year’s EPS is likely to be 96.24. At an EPS of 96.24 and a price of Rs.1421/90- the P/E is only 14.77 which is very cheap. Just to maintain its current P/E of 17.43, Infosys would have to be priced at Rs.1677/-. This is the main reason why we saw it jump in the last two days.

In a year or two, the situation in the US should be better than what it is today. As the situation improves, the P/Es will have to be rerated. At 17x what is expensive today may even be cheap at 25x when the situation is better. Considering that the situation does not change drastically but only becomes a little better, we can easily expect Infosys, a market leader, to be trading at 22x its earnings. With an EPS of 96.24 and a P/E of 22, Infosys would have to be trading at Rs.2117/-. Since the markets always look into the future and assuming that Infosys again gives a guidance of 18% for FY 2009-2010, then the EPS in 2010 would be 113.56 and with an EPS of 113.56 and a price of 2117, it gives a forward P/E of only 18.64x which is not, in any way, stretched. It is very reasonable. So 2100 maybe the target one may be looking at a year from now.

But what do the technicals say? Look at the daily chart of Infosys above. Two good days have pushed the price decisively out of the range between 1400 and 1550. This range breakout gives us a target of between 1650-1700. On the other hand, it has also broken out of its downtrending line and has come back in an intermediate uptrend. The target of this pattern is close to 1950. So, with a little bit of resistance between 1650 to 1700 it may go up to meet its target of between 1900 and 1950. It’s a buy now with a stop loss of 1520.

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!!!

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

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Smaller Range Broken, Bigger Range to Continue

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

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

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

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

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

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

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

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

Happy investing!!!

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Closer to a Breakout

The apex (end) of the triangle has been reached. Above 4800, the Nifty should have broken out of the triangle. And it did and stayed above 4800 for about an hour or so. But it did not give us the kind of ‘explosive’ move that we were looking for. If it does not then we shall consider this to be a false breakout. If it does go above 4800 tomorrow, which seems improbable at the moment, then we shall again be looking for that ‘explosive move’.

The world markets are in a bad shape. The Dow Jones was down about 2% while the Nasdaq was down about 3% on Friday. The Asian markets, which were all in the green on Friday, reacted sharply on Monday with the Nikkei (Japan) and Hang Seng (Hong Kong) down in excess of 3%, the Singapore Straits almost there, and the Indonesian markets down by 1.4%. The Chinese markets were the biggest losers and the Shanghai index lost almost 6% on Monday. The European markets, at 6pm IST on Monday, were down about a percent each.

The triangle remains valid between the levels of 4700 and 4770 now. Any move outside these boundaries, without any explosive move, will mean that the triangle is not valid. In all probability, unless the American markets do well on Monday night and the Asian markets do brilliantly on Tuesday morning, Nifty will open between 100-150 points down. This means that we shall be looking at an opening figure of around 4650. And that is already outside the limits of the triangle. So either an explosive down move may come which may take us all the way down to 4480 or we should find support near 4630. If we do find support at 4630 then that invalidates the triangle pattern.

But what is it if it is not a triangle. Let us look at some other scenarios as well. For that refer to the chart above. This is the daily chart of the Nifty. You can see two blue rectangles here. These are the two ranges that the Nifty is moving in. One is a broader range between 4480 and 4980 and the other is a range within this range between 4630 and 4830. One interesting point that comes to mind is this smaller range is exactly in the centre of the bigger range. The mid point of both these ranges happens to be at 4730. So, 4730 is a key pivotal point below which the markets remain bearish and above which they turn bullish. So, if the triangle is not valid then we are looking to move between these two ranges. A move outside the broader range only will signify a clear trend for the Nifty.

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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Renewable Energy: Stocks of the Future

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

It was another day for the Nifty within the range. Volatility of the Nifty is now very low. Now the range is only 120 points wide between 4680 and 4800. We should see a breakout soon enough. A breakout out of this contracting rectangle should take the Nifty back within the broader range of 4620-4950. A move outside this broader range will give us a real movement. There is no use of making predictions about the direction of the breakout. The market will tell us which side it will break out towards. We shall position ourselves to buy in case of a breakout on the upper side.

Since the long term trend of the Nifty remains up, we should plan to buy on every dip. A dip is a rare occasion in a bull market. Luckily, we are getting these opportunities every third day now.

Yesterday, we had discussed that the fundamentals of the economy are still strong and that the markets have essentially crashed because of low liquidity, heavy speculation and problems in the USA and not because of any fundamental reasons of our country. And as the problems in the USA settle down, we should see some recovery in our markets too.

Today we shall discuss about the energy sector. Let’s start with oil. We know that oil is present only in limited quantity and there are only finite sources of oil available. There are sources which tell us that the production of oil has already peaked out or is likely to peak out in this decade. And also that for the last several years the world oil consumption has been more than the oil production and the demand is still growing. With growing demand (approximately at the rate of 1.4% per annum) and reduced production, we are eating into our reserves and according to the NATIONAL CENTER FOR POLICY ANALYSIS (NCPA) the oil available shall only last till the year 2056, but with better conservation and the use of substitutes we may actually scrape through to the year 2100.

To protect our future generations from going back into the stone age, we shall have to look for alternative sources of energy. A lot of countries are now taking steps to shift to alternative sources so that we could reduce the consumption of oil and make it last longer. Warren Buffett once said that If a business does well, the stock eventually follows. Alternative energy is one of those concepts which will continue to do well, at least in our lifetime. So, it may make sense to buy stocks which are into renewable energy like Suzlon (wind power), NTPC (thermal power), JP Hydro (Hydro and thermal power), Neyveli Lignites, Webel SL (Solar energy) etc. Buy them today and hold for long term. Your children could become crorepatis with these stocks some day.

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 article 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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Fundamentally Strong Reasons to Buy

Today’s movement did not help the markets much except giving us a day in the green. The markets are still stuck within a range and there are concerns amongst some circles that the markets may break down below the range rather than breaking out upwards. All that is very true. The markets could break down either way. There were some positive signals in the short term charts but those too seem to have fizzled out.

Stocks, or the markets as a whole, cannot be down forever. There has to be some value buying at some level. Agreed, that the GDP growth rate is slowing but it’s still a very good rate of growth. Agreed, that the inflation is rising and that the growth may become still slower but we will be able to control the inflation and the companies will be able to show good earnings despite inflationary pressures. And then the value buying will emerge. The smart money always buys first. We have to ensure that we become smarter and buy with them, if not before them.

Presented below is an analysis of the value and the fundamentals in the Indian markets, which I had received from someone in an email. The source is unknown so cannot give credit where it is due, for the same. The last leg of the recent bull market was driven more because of excess liquidity, leveraging and rumours than because of fundamental reasons. The same situation had been last seen in Feb-Mar 2000 when the markets rose because of the dotcom bubble. After Mar 2000 we saw a huge bear market which lasted almost three years. Is it going to be the same this time too? Let us do some number crunching and look at the fundamentals then and the fundamentals now.

In 2000-01, the markets were trading at a forward P/E (price to earnings ratio) of 35 times while this time they are trading at 16 times. The savings and investments (as a percentage of GDP) which were about 24% that time are now about 35%. The GDP growth that time was 4.35% and now it is 8.73%. Inflation was growing at 7.16% in 2000-01 and is now 4.21% (and is now catching up). What is important is the earnings growth which was (on an average) 4.43% 8 years ago is now between 17-20%. The rally, which at that time was mostly in the Technology, media and telecom sector is more broad based now.

The last 10 years data reveals that while the Sensex now is only 4.1 times of the Sensex then, whereas the total earnings now are 7.5 times of the total earnings then (of the BSE 500 stocks). The EPS (Earnings Per Share) has been showing a growth of more than 30% in the last two years and an average growth of about 25% in the last 5 years. Assuming that the EPS grows by 20% in the next three years, by 17% in the three years after that, 15% in the next block of three years and then by 12% in 2018 and if the P/E ratio stays at 16 times then by 2018, the Sensex should be trading at a value of 63485 in the year 2018. The following table shows what the value of the Sensex should be in each financial year upto 2018 at various P/E levels between 12 and 22, if the EPS follows the growth pattern shown above.

Sensex at 87292 at a P/E of 22 in 2018 is unbelievable. But you never know, with the kind of growth India has been witnessing, that may be very much possible.

The above exercise just goes on to prove that the fundamentals of our country and the Sensex are still very attractive. We should now start to look for buying opportunities whenever they come. A day when there is a gap down opening or a lot of panic should be a good day to start. Buy good blue chip stocks which have excellent fundamentals but have been badly beaten down by the street. These companies, over a period of time, will definitely outperform the broader market.

I remember the time nine years ago when I was doing my MBA and I remember our Portfolio Management professor showing exuberance (and a pleasant shock) over the Dow touching 10000 the previous day. And at that moment I was wondering whether I would ever see the Sensex at 10000 in my lifetime (Sensex was only about 3800 in those days). And I thought that even if I did see Sensex at 10000 some day, Dow would probably be somewhere near 50000 at that time. I didn’t have an idea that when Sensex touched 20000, Dow would have been languishing at 14000 levels. Well, that is history. Lets see what the future holds for us.

Happy investing!!!

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Range Bound Markets Continue

On almost a daily basis, we are seeing one or two up days in the Nifty followed by one or two down days. This happens within a range. We have also been observing since the last three weeks that the Nifty has been making higher lows and lower highs, signs that it is going inside a contracting triangle. This triangle has been drawn in the 60 minutes chart shown below.

This triangle will be broken soon, especially since we are now approaching the apex (end) of the triangle. A move below 4650 or, on the other side, above 4830 will signify the end of this triangle and that will bring us back in the broader range between 4480 (and more recently, 4625) and 4970 which has been shown by the dotted brown lines. Assuming that this triangle is broken out on the upside at a level of 4830 then we get a target of approximately 5450. But before that we would still have to cross 4970. So, while a target of 5450 is possible but some amount of resistance should be expected near 4970.

Why have we been stuck in this trading range for such a long time? If we remember correctly the market fell sometime in Jan and now it is April. We are in the 3rd month now. Well, to be precise 77 days (calendar days, not trading days) have already gone by since we made that low of 4448 on the Nifty. I actually did an analysis of the major falls that we have seen in this bull market which started in 2003. The markets have seen major lows in May 2004, Jan 2005, June 2006, Mar 2007 and now Jan 2008. The last four times the markets came out of the consolidation the quickest (39 days) in Apr 2007 and the slowest (161 days) in June 2005. On an average the consolidation lasted for 81 days. So, that suggests we should soon be out of this range, maybe another week or two. The other occasions have also seen corrections of more than 30% but they were slower. This time we lost about 30% in a week. And a longer consolidation/base-building is expected.

We are going to be stuck in a range. It often happens that the markets may move out of a range just to get into another range. We should only buy when the markets are giving us a signal that a move out of the range is likely and that the probability of a profitable trade is higher. Of course, if the market moves against us we can get stopped out too. Getting stopped out is always possible but that is a risk one has to take if one intends winning the game of profitable stock trading.

Happy investing!!!

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Inflation Rises, Markets Fall

Friday, again turned out to be a bad day for the markets. Just when the global cues were okay and the markets were showing some signs of recovery, we were hit by another bit of negative news. This time the culprit was the inflation data (wholesale price index), which showed that it is now rising with a growth rate of 7%. Gradually, it has started picking up speed too. The markets went down because it seemed imminent that the RBI would soon have to increase the interest rates to control inflation.

Seen above is the daily chart of Nifty. We can see from that chart that between the period Jan 21st to Mar 7th, the Nifty was in a range of between 4800 and 5550. Finally it broke out of that range on Mar 7th, against all expectations and when a target of 4100 was expected, it went into another small range between 4480 and 5000. In the intermediate term, nothing can be said until this range is broken out of. The short term trend has now again changed to down. Stay away from the markets until the trend emerges clearly. Long positions taken yesterday, if any, may still be held with a stop loss of 4480.

Lately, there has been so much talk about the economics of our country. Talk that our country’s economy is growing and that the GDP of the country which was exhibiting a growth rate of 8.5% to 9% has now reduced to about 7%. Also, the inflation index (wholesale price index) which was floating below 5% for quite sometime has now increased to more than 7%. And talk about whether the interest rates should be decreased to reduce the interest rate differential between America and India. Or whether they should actually be increased to control inflation? But, how many of us really understand what all this talk is about? What really is the GDP, what is inflation, how do interest rates affect inflation/GDP? Do we really understand those things or do we leave it all for ‘Dr. Reddy’ and ‘PC Uncle’ to handle? Well, while ‘PC Uncle’ (Mr. P Chidambaram) and Dr. YV Reddy are much more knowledgeable about these things than we are, we should really be knowledgeable enough to know whether they are managing our country properly or not. Knowledgeable enough to know that what they are doing is best for the country. And knowledgeable enough to know that we are not being taken for a ride.

This post is definitely not written to explain all fundamentals of economics and is most definitely not going to go too deep into everything. It is just a very simple mail to make the readers understand a little bit about these economic matters so that they know what all this talk about GDP, inflation and interest rates really is about. At the end of the post, I’m sure a lot of you would still have a lot of unanswered questions. You can please leave all your questions and comments about this post in the comments section below and I will try and address those queries (with whatever little knowledge that I have).

There is an earlier post which has talked about what GDP really is. In layman’s language, GDP is the sum of the total consumption, investments, government spending and net exports. In simpler words, it measures the financial health of a country. When we say that GDP is showing a growth rate of 8% that means that if the GDP today is a trillion dollars, then next year it would probably be 80 billion dollars more than a trillion or $1.08 trillion. But how does the GDP grow?

When we begin to think of a starting point of an economy, we don’t know where to begin with. It’s all like the chicken and the egg story. But let’s begin anywhere. Let’s say that a country is in a deep recession, companies are not able to make profits, they have to cut down production, lay off people and everything looks bleak. Then the central bank reduces the interest rates. This makes it cheaper for the companies to borrow money. Some of the daring ones borrow more money to increase production. This needs additional workforce. The number of jobs increase, the employees start getting money and their spending (on various items like necessities, wants and luxuries – in that order) increases, which increases the sales of the companies. Additional sales means additional profits, which means more production, more jobs and more spending. And suddenly things are not looking all that bad. There are jobs available, the companies’ profits are rising and there is more consumer spending, all of which contribute towards the increase in GDP. Everything is rosy now.

Everything is rosy now? For how long? With so much money available in hand, the consumers are willing to spend on everything, even on luxuries. And they don’t mind paying a little bit additional for anything since they have additional money available. So, demand increases and supplies are not enough to meet all this demand. So, a simple law of economics comes into force and prices increase. This increase in prices leads to inflation. Inflation cannot be left untackled because soon the prices may start rising exponentially. And inflation is the worst enemy of growth.

The only way to tackle inflation is to reduce the demand, which can only be done by tightening the money supply. And to tighten the money supply, the central bank has to increase the interest rates. An increase in interest rates leads to decreased borrowing, which in turn leads to decreased production, lay offs and decreased consumer spending. That leads to lower sales, lower profits and soon the companies again start making losses.

It all starts off with the GDP growth rate coming down and down and soon there is no growth. The expenditures are more than the incomes and the country starts eating into its reserves. That period when the growth rate becomes negative is called a recession. That is what America is going towards, though unofficially people have started saying that it already is in a recession. All these things don’t happen quickly. A full cycle from a peak to a trough and back to the peak again (or vice versa) usually takes between 4-5 years.

US is moving towards a recession. India is not. India still has a growth rate above of 7%. So the rate of growth has definitely reduced from 9% and above to between 7 to 7.5%. That is not recession. Recession will come when this growth rate keeps decreasing to zero and then becomes less than zero. And that is still a long time away.

Presently, inflation is catching up with India and soon the central bank (RBI) may have to increase the interest rates. That will affect the growth rate but inflation is a bigger enemy of the country than a lower growth rate. Mr. SS Tarapore, a noted economist and a former RBI Deputy Governor, in a recent interview on CNBC mentioned that the inflation index “greatly and grossly understates” the extent of inflation which means that if the inflation index is 7% then at the grassroots level (consumer price index) it is actually much more than that and that it is a ‘sin’ to let the inflation increase because it affects the poorer section of the society more badly. He is of the view that the RBI should increase repo rates by about half a percent in one or two steps and should introduce an incremental cash reserve ratio. He says that the younger economists who argue that the rupee should be allowed to appreciate and the interest rates should be lowered are wrong because doing that would be an “unmitigated disaster”, specially for a country like India which still has a fiscal deficit to deal with. He finally ended the interview by saying that there has to be a trade off of “lower interest rates and higher inflation” with “lower inflation and higher interest rates”. According to him that definitely would cause pain but one has to learn to live with the pain.

I hope, after reading this article, things like GDP, growth rate, inflation, interest rates seem to be a lot simpler. In case you still find any difficulty, please feel free to leave your queries by clicking on comments below.

Happy investing!!!

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

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Another Doji - More Indecision

The Nifty, after opening went up to make a high of 4832, almost 90 points above yesterday’s close and then, like all other days lost all its gains to come 2 points below yesterday and then slightly recovered to close about 30 points in the green. In the process it made yet another doji, the third consecutive one.

As said in yesterday’s newsletter, and whenever we talk about them, dojis are a sign of indecision. It is a period when neither the bulls, nor the bears, are confident of what they, or the markets, are likely to do. In such periods, the markets keep changing hands. From the bulls to the bears and from the bears to the bulls. Nobody wants to carry her positions to the next day, lest the market should move against them. Such periods don’t last long in the markets. They are there for only a day or so. And then a decisive move comes. The fact that we have three consecutive dojis means that when the decisive move comes, it is going to be explosive. Which is why positioning ourselves in the right direction is important.

The charts don’t tell us much today (which is why we are not carrying any out today) except that instead of two, there are three dojis now and there is still a positive divergence visible. It is almost a certainty that after these dojis an explosive move is likely but the direction is unknown. Do we get any cues from the global markets? Not at the moment. Because at the time of writing this newsletter all European markets were about half a percent down (which is not too much of a cue), Dow is 16 points down and Nasdaq was slightly in the green. The only indication that we get from the charts is that it is more likely to go up than to come down.

Taking long positions in such a scenario is advisable because going up carries a higher probability than coming down. Moreover, we have a pivot low available at 4625 which becomes our stop loss for long positions. Buying calls is an even cheaper method of taking long positions where your loss is already limited and by maintaining a stop loss of 4600-4625, the loss becomes even lesser. And the profits, if the markets were to go up from here, would be phenomenal.

A surprising revelation. I carried out an analysis of the relative performance of the top eight world markets in the last four months, i.e. Dec 2007 onwards. And they rank in the following order, from the best to the worst. Taiwan, Dow Jones (USA), Kospi (Korea), FTSE (UK), Straits (Singapore), Hang Seng (Hong Kong), Nikkei (Japan) and Nifty. Considering that there are fears of recession in the USA, that is still the 2nd best ranked market. And our economy which is supposed to be the best of this lot is the worst performer. Clearly, these are times of excesses. People are being overly pessimistic and fearful. This is the time to grab the opportunities.

Today I leave you with one of the famous quotes by America's richest man and the world's greatest investor, Warren Buffett, who once said about himself and his company:

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Happy investing!!! This is the time to become greedy.

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Markets Poised To Head Up

The Dow Jones closed almost 400 points up last night and all Asian markets were up by about 3% this morning. As suggested in yesterday’s newsletter, such drastic movements in global exchanges are likely to have an effect on our markets too. As predicted, we also opened with a 3% gap but, unfortunately, that was not enough to sustain it throughout the day. All through the day the markets kept losing ground and by close they were absolutely flat.

The chart shown above is the daily chart of Nifty and is actually a repeat of an earlier chart because we have done this exercise in an earlier newsletter. We are talking about dojis here and what they signify. To understand a doji, one has to understand a candle first. Let us take the drawing given here. This shows four candles. A candle essentially consists of four prices, namely, the opening price, the high of the day, the low of the day and the closing price. The highest point of the candle is the high of the day and the lowest point in a candle is the low of the day. To determine the opening price and the closing price, one has to see whether the candle is shaded or unshaded, or in other words, filled or unfilled. If the candle is shaded or filled, it means the closing price is lower than the opening price, which means that the price has gone down during the day. Similarly, in unshaded or unfilled candles, the closing is greater than the opening which means that the price has gone up during the day. These two prices are joined together to form a rectangle. This rectangle is called the body of the candle and the lines above and below this body are called the shadows of the candle. Now, let us see what a doji is. When the opening and the closing price of a day is the same (or very close to each other), there is no body formed and that is called a doji. So, in this drawing on the first and the third day the price has come down during the day. On the second day the price has gone up during the day and the last candle is a doji.

One characteristic of a doji that they represent indecision and that is why they are usually found at short term market tops or short term market bottoms. After a doji day, prices are likely to reverse their trend for the next 2 to 3 days. Now looking at the chart of the Nifty above, we have marked all (and almost) dojis with small blue arrows. And you can see that they are, generally, found near short term market tops/bottoms. Let us look at the period in Dec 2007 and Jan 2008 more closely. It can be seen that there are a cluster of dojis at the top during this period. It is important to look at the Relative Strength Index (RSI) also along with the price. While the price, during this period, was making higher highs and higher lows, the RSI was not doing so. This means that even though the price was going up, the strength of the index was coming down. That was a very clear indication that the market could come down. And that it did in January. What was not known was the magnitude of the fall. While a level of 5200 was visible but 4450 was not expected.

Now let us look at the months of February and March. The black lines signify the tops made by the market during this time. This means that the trend is down. The trend will turn to up when we have at least one higher bottom and one higher high. A higher bottom has already been made (hopefully) and a higher top would be made if the price were to go above 4971. Is that possible in the short term? I believe, it is. Why do I say that? Well, look at the chart. We have seen two doji days including today which must signify that a short term bottom has already been made or is close by. Look at the RSI. While the price has gone on to make a lower high, but the RSI during the same period (10th Mar onwards) has made a higher high, which means that the price may be coming down but the strength is actually increasing. This is what we call a bullish or a positive divergence. So, with these indicators one can make out that the price may change its trend soon enough. All we need is a close above 4971 and we will be back in an uptrend. For investors this may be the right time to build up long positions. For short term traders too that level holds significance because that level will confirm the bullish head and shoulders pattern, the target for which is 5400. This may be the right time to buy at the money or out of the money (if you want them cheap) calls. 4800 calls are available at around 140, 5000 calls around 65 and 5200 calls near 30.

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.

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

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

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

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

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

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

Hum Honge Kaamyab, Hum Honge Kaamyab,

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

Ho Ho Man Mein Hai Vishwas, Poora Hai Vishwas,

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

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

Happy investing!!!

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

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