Expect More Bounce in the Short Term

The Nifty opened flat, went up in the first 15-20 minutes after opening but soon started coming down. The support at 3882/3878 was soon broken and it took the Nifty to make a new low at 3848 before it started moving up again. And what a rally it was! A 200 point rally in just 2 hours of trading (between 1PM and 3PM) ensued without any correction whatsoever. On the 5 minutes charts, there were only two candles during that period which had a low lower than the low of the previous candle. In the last 30 minutes the Nifty did display some resistance near 4100.

I have attached the 30 minutes chart of the Nifty today which shows the fantastic rally that took place today. There were no complaints from the rally today, except that it fell just short of confirming the uptrend. As we can see from the charts, the rally stopped exactly at the resistance line. Thankfully, the Relative Strength Index (RSI) has given an indication that the rally may go past the resistance line. It has done so by itself going above the line that was providing resistance to it. A confirmation using the trendline technique will come if the Nifty were to cross this resistance line. If we are using the Dow Theory then a short term uptrend would be confirmed only if it were to cross its most recent pivot high which lies at 4325 as shown by the dashed green line. But one should remember that would be confirmation of only a short term uptrend. An intermediate term uptrend would be confirmed only if the Nifty were to cross 4680.

But why did the market bounce back today? Why were we not expecting a bounce back? Well, the answer is that’s what happens in a capitulation. The capitulation day makes the market so negative that everybody is expecting it to go down. All investors are bearish, all analysts are bearish, all charts are bearish and there is a lot of pessimism around. Though, there are signals available that capitulation is coming, yet the market decides when it has capitulated completely. As mentioned in yesterday’s post, capitulation like symptoms were visible, but I personally feel the market hasn’t completely capitulated yet. Of course, that is my personal opinion and I could be wrong too. I support my reasoning with the logic that a capitulation is much sharper and lasts much longer than what was seen in the last 3-4 days.

The main reasons why the markets went up today, in my opinion, were mainly political and also valuation based. It seems certain now that the Samajwadi Party (SP) would provide support to the government on the nuclear deal issue in case of a Left pull-out. It also seems certain that the government would not fall even if the Left pulls out and that the nuclear deal might go through. While this rally is just discounting the positive developments, we should see a big rally when the nuclear deal goes through without the government falling. Looking at the valuations, Nifty, which was trading at a P/E (Price to Earnings Ratio) of over 28 in early January was down to 16.66 yesterday (based on current earnings – Forward P/E would be even lower). The Nifty Midcap 50 Index was even more attractive. The P/E which was close to 25 in January was down to only 10.15 yesterday. And a P/E of 10-15 times is a very good level to pick up stocks. But fundamentally speaking, high crude prices and inflation still remain areas of concern.

So, what do we do? Is it a bear market rally or the beginning of a bull market? We don’t know for sure right now and the best thing to do would be to follow the market and wait for it to tell us what to do. We should go long in the short term if a short term uptrend is confirmed (with proper stop losses, of course). More positions for a longer term can then be added when an intermediate term uptrend is also confirmed. In case the market comes down without confirming an intermediate term uptrend, we would know that it was just a bear market rally.

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Capitulation Like Symptoms Visible

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

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

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

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

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

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

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Below 4000, More Downside Possible

Surprisingly, the markets did not open with a negative bias today and in fact started gaining ground in the beginning of the day. But the good times didn’t last long, in fact, not even a full hour and by 11AM, the markets began their southward journey, and finally found a little bit of support near 4020 at 3PM which held till the closing bell. The break of the support at 4093 (most recent pivot low) was a big negative for the Nifty. The Nifty eventually closed at 4040.55, which happens to be the lowest close since 20th April 2007.

This also means that our Elliott Wave counts of 1,2,3,4,5 of corrective wave C, as mentioned in one of the previous posts has gone wrong. It also means that the fifth wave has not ended as yet. This means that the fifth wave is also an extended wave. We don’t know how long it will be. What we know is that it cannot be longer than the third wave. The third wave started at 5167.40 on May 16, 2008 and ended at 4369.80 (assuming that to be the end of wave 3) on June 10, 2008, thus measuring 797.60 points. The fifth wave started on June 18, 2008 at 4679.75. This means that the wave five cannot go below 3882.15 in any case. If it does then it means that our wave counting is wrong again and that we may still be in wave 3 of major corrective wave C.

For tomorrow we have support between 3970 and 4000, as was seen in the chart shown yesterday. According to the Elliott Wave Counts (assuming them to be correct), we do not expect the final low for the Nifty below 3882.15. So, we may be looking at support between 3882 and 4000. Shown above is the daily chart of Nifty with Elliott Wave Counts and with the Bollinger Bands. The close of the Nifty today was below the lower band, and as mentioned in an earlier post, it means that if the close does not come back within the band tomorrow then we may be looking at more downside. It effectively means that if it breaks 4000 tomorrow then we may be looking at a target near 3882.

The political situation also worsened (or improved??) today. The Prime Minister has decided to go and attend the G8 summit. The Left has taken it as a signal that the Government has decided to go ahead with the nuclear deal and reiterated, once again, that it would withdraw support if it did so. To make matters worse, the Prime Minister said that “there has been nothing new with the Left’s stand”. The political analysts view his confidence as a confirmation that the Government is confident of getting the support of the Samajwadi Party (SP) in case the Left withdraws support. With the UPA tally at 225 and adding 39 as the SP support the UPA still falls 8 short of the magic number of 272 to get a majority. However, getting the support of 8 more may not be too difficult a problem for the government. In case it does get the support, it would mean that the nuclear deal would go through and the government also will not fall. With the Left out of the way, the Government actually may be able to take some positive decisions (not saying that it has too much of time to do that since elections are due in May next year). That would be an ideal situation for the markets to begin a new bull market.

But inflation would still remain a concern and the market may probably be looking at a stabilization in the inflation rates before starting to go up again. With the world commodity prices still increasing and crude on the rise again, and the effect of the petrol price hike last month trickling down to other industries, the inflation figures are likely to become worse at least for another month or two, before stabilizing.

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Weak Opening on Nifty Expected

After two days of impressive gains, the Nifty fell flat on its face on Friday to reach near the earlier lows near 4100. It was mainly because of highly negative global cues. The Dow Jones and Nasdaq were both heavily down. The European markets were down and so were the Asian markets on Friday. On account of global cues, Friday wasn’t a good day either, with the Dow Jones falling more than a hundred points and the European markets also closing about half a percent down except the FTSE 100 which kept trading with a negative bias throughout the day but closed just a touch in the green. This makes us realize that if Asian makets are no better on Monday then we are looking at another weak opening which will push us below the previous lows, which lies only 43 points below Friday’s closing value of the Nifty.

When there is no sense of optimism left in the markets, it makes predicting the lows very difficult. This is the most difficult times of the markets. Optimism is just not present near the end of the bear markets and in the beginning of bull markets. Every rise is seen with skepticism and supports break relentlessly. Maybe our prediction of spending 34 weeks (or 55 weeks) in the bear market is coming out to be correct.

A screenshot of what I had written then is given above. When there is no optimism present, we don’t know which support is strong enough to hold and which weak enough to break. We can’t predict the lows but we can look for supports.

I leave you today with the weekly chart of Nifty with some possible support lines drawn on the chart. The nearest ones have been drawn as thick green lines while the lower supports have been drawn as thin ones. It can be clearly seen that there are two supports near 4000, one near 3500 and another near 3100. It is also expected that 4000 being a round number will provide some psychological support too.

I just used a sentence in the previous paragraph that optimism is just not present near the end of the bear markets and in the beginning of bull markets. Does that mean that we are near the end of the bear market? Well, nothing can be said as of now. We may be near the end or we may be just 6 months into a long 2 to 2 and a half year bear market. All I can say, at the moment, is that while optimism is absent these days, bear markets always tend to finish with a lot of panic and a capitulation. Incidentally, that too has been absent right now. But, at present, the 4100 level is of a lot of importance. With weak global cues, 4100 may be broken tomorrow. But if it remains below 4100 for an extended period of time (about 2-3 hours into the opening) then we may be looking at more downside. With no optimism present, it is needless to say that one should refrain from taking any long positions in the short or medium term. While it does not make sense to take long term plus positions also, I feel that over a longer term period, timing the market is not of much importance. Fundamentally good stocks will never give you a loss if you hold them over a long term horizon. For long term investors any time is the right time.

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Birth of a New Bull Market?

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

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

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

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

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

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

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

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Will the Prime Minister Resign Today?

Yesterday the RBI increased the CRR to 8.75% up 50 basis points and increased the repo rate also by 50 basis points to bring it to 8.5% as against the 8% that it was at currently. This was largely expected by the market, but a small and immediate reaction was to be expected, as our column had predicted yesterday. And that is what happened at the opening bell. The Nifty opened a 100 points down and immediately started recovering from there. It recovered for a couple of hours before it went into a small 30 points range for over 3 hours. Finally, it showed a brief and small spurt in prices in the last 30 minutes.

The UPA-Left meet was expected today on the nuclear deal issue and since that did not happen till the market closed, there was no reaction. It is surprising that the government has yet again managed to buy more time. This time the members of the meeting decided to meet again to ‘finalise the findings’ on the deal. While it was announced that the meeting would take place ‘in due course’, it is not expected to take place before a couple of weeks. Meanwhile, there were rumours (as reported by a news channel) that the Prime Minister, Dr. Manmohan Singh, may tender his resignation before the G8 summit which is to start on July 8, 2008. There is a report of a cabinet meeting being held at 11AM tomorrow. I wonder if Dr. Manmohan Singh will submit his resignation to the cabinet then.

Seen above is the same 60 minutes chart of the Nifty that was shown yesterday, except that it has been updated with today’s data. As expected and discussed in yesterday’s post, the Nifty bounced back from its wave 5 target levels after a positive divergence was seen between the Nifty and its Relative Strength Index (RSI). If this was the end of the wave 5 of the corrective wave C, it would mean that the bear trend has ended today. Is it so? Well, that is very difficult to say right now. That is the problem with the end of trends. It is not possible to say that the trend has changed unless a confirmation comes through. Unfortunately, a confirmation of the intermediate trend changing will come only if the Nifty were to cross 4680, while a warning that a trend change might occur will come if the Nifty were to cross 4530. This level may change with time. Elliott Wave specialists can say with certainty whether the trend has ended or not even before the confirmation comes. But I hear no analysts shouting from the rooftops as yet that this is the end. I, myself, am no specialist of Elliott Waves but my analysis says (considering that our wave counts are correct) this may have been the final low made by the Nifty in this downtrend. However, if Dr. Manmohan Singh does resign tomorrow, we shall have another deep knee jerk reaction which will lead to capitulation and then a final low being made. It is difficult to say whether a final low would be made now (in a day or two) or shall we have to wait till the last week of August as our analysis on Fibonacci techniques suggested in an earlier post.

The Nifty opened about 100 points down today but I wouldn’t go as far as to say that it was capitulation, mainly because there was no selling climax. In the absence of a capitulation and a selling climax, it will be very difficult (and risky) to say that a final low has been made. What options are we left with? A short term uptrend shall be signified above 4328 while an intermediate term uptrend, as already mentioned, shall be confirmed above 4680. I’m afraid, at the moment we do not have too many options but to wait and let the market tell us what it wants to do. I would be much more confident about predicting the markets after the government falls. Let us see if that does happen.

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Capitulation and Selling Climax Go Hand in Hand

The Nifty today opened flat with no global cues to follow but soon the strong downward momentum started pushing the Nifty down. It did attempt some sort of recovery in the late afternoon session, but failed miserably and closed after making a new low for the day. Today’s close was also the lowest close since 24th August 2007. It finally closed the day at 4191 while the low of the day today was 4156.10, which was again close to the 4157 support that we had mentioned in Sunday’s post.

The market is falling with so much of momentum that all supports are being wiped out. Such kinds of fall ultimately lead to panic like situations and then capitulation. But in such situations it is difficult to predict where the bottom would be. Seen above is the 60 minutes chart of the Nifty. This chart shows the 5 wave pattern that the corrective wave C of the Nifty has been following as has been mentioned in the posts dated June 18, 2008 and June 3, 2008. One of the concepts of Elliott Waves, which was not mentioned in any of the previous posts is that you can find out the wave 3, wave 4 and wave 5 approximate targets if wave 1 and wave 2 have been formed. Now to find out the wave 5 target here, we connect the end of wave 2 and end of wave 4 with a trendline. We then draw a trendline parallel to this line which passes through the end of wave 3. This line should give the approximate target of wave 5. As one can see, the target given by this line is near 4130 and a low of 4156 was already made today. It is possible that the target is achieved early in the morning tomorrow. It is also quite possible that with the strong downward momentum this target is overshot. Only time will tell where the market will stop.

But there is another short term positive visible and that is a bullish divergence between the price and the RSI as has been marked within the circles. The price has gone on to make newer lows while the RSI is still above its previous low. This suggests that even though the price is on the way down, the internal strength in the Nifty is actually increasing which suggests that an end to this downtrend may be near.

But then I just heard the news that the RBI has increased the CRR and repo rates by 50 basis points each. While the repo rate has been increased immediately, the CRR hike is to be implemented in two steps of 25 basis points each. Our newsletter, and many other market participants, were already expecting a rate hike, as was mentioned in yesterday’s post. A story on expressindia says that a meeting tomorrow between the Left and the Government will decide the fate of the nuclear deal and the government. The Left has made it pretty clear that if the Government decides to go ahead with the deal, it will withdraw support. The UPA allies are of the opinion that with inflation at a 13 year high, chances of a re-election in the event of snap polls are bleak and are pressurizing the government to delay the deal. However, there is strong speculation that the Prime Minister, Dr. Manmohan Singh, who has invested a lot of personal reputation in this deal, is unlikely to abandon the deal and may resign in case an agreement is not reached. If this happens, it may well mean that we are looking at a capitulation happening very soon, maybe as soon as tomorrow.

Uma, in her blog post regarding volumes, rightly says that One of the key signs of a market that's bottoming out, is low volumes. But, the huge volumes being traded on NSE show no signs of going down. What she says is perfectly right, except in cases of a selling climax, which usually accompanies capitulation. A selling climax happens when there is a big price fall along with a huge volume expansion. The result is that there are no sellers left post-climax. The aftermath is light volumes and flat prices. This article by Devangshu Datta, a technical analyst, very well explains all about a selling climax.

In my opinion, we are going to see a selling climax and a capitulation tomorrow or the day after. The consequent behaviour of the post-capitulation markets will be, as expected, light volumes and flat prices. But we would have to go through that pain if we want the markets to improve and recover and cross their earlier highs. It may be a very difficult task because a drop of 35% from there has brought us here but to reach the same level we need a rise of 55% and not 35%. But with strong fundamentals and God’s grace even that might be possible. Who knows?

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Capitulation? Not yet!!!

The Indian Government, two weeks ago increased the price of petrol by Rs.5/- per litre, diesel by Rs.3/- per litre and the price of domestic LPG by Rs.50/- per cylinder. This was bound to set inflation on fire, which it did as was shown by the inflation figures zooming past 11% for the week ended 7th June 2008. Not to say, that this price hike was not needed. In fact, it was very badly needed and much earlier than when it was finally announced.

Back in 1974, India was a very poor country and when the price of crude virtually doubled overnight, India could afford no subsidies to its citizens and they had to bear the brunt of the price increase. The same happened in the US in 1979 when they abolished all subsidies and the full price of crude was passed down to the consumers, which eventually led to the demand going down. Today, India is a much richer country but none the wiser. It can afford all these subsidies which is why the price passed down to consumers is only about $60 a barrel as against the $135 a barrel ruling in international markets. This heavy subsidy artificially keeps the demand high and hence the prices. The moment the full price is passed down to consumers, the demand will go down which should bring the prices down. So, in effect, by subsidizing crude prices we are artificially keeping the demand high and hence the prices are not coming down. So, while it is increasing the subsidy burden on our government, all that money is actually going to the OPEC countries. This is very well explained by Mr. Swaminathan S Anklesaria Aiyar in a column titled Swaminomics on the Times of India. This article also got me thinking on what am I doing in India? I should instead have been in Venezuela where petrol costs only Rs.2/- a litre. Paradise. Absolute paradise.

The Nifty continued its southward journey today, but did find support between the 4230 and 4240 levels on two occasions during the day. This was very much in line with our expectations in yesterday’s post where we had expected 4234 as one of the levels where the Nifty could find support. One of the supports was also placed at 4157. So, could the Nifty go down to that level or is 4234 the final low? The answer is, we don’t know. The markets would have to capitulate first to indicate that a reversal is possible. Capitulation happens when most of the investors lose their confidence in the markets and close their positions. Capitulation results in a panic like situation where the prices shave off quite a lot and quite fast. What happened in late January 2008 was a capitulation like situation when the markets lost about 30% from its highs in just 10 trading days. A similar situation is happening now when the markets have lost almost 10% in the last 4 trading sessions. But I don’t think a capitulation has happened yet.

With the inflation going past 11% and the repo rate being only 8%, all our investments in fixed deposits are now earning negative returns. This imbalance in the bank rates and the inflation cannot be maintained for long. The RBI shall have to intervene and increase the rates by at least a 100 basis points (could be in 2-3 steps rather than in one go) and such measures would have to be taken much before the scheduled credit policy meeting due on July 29, 2008. The market has already started discounting rate hikes into the prices but a strong reaction, albeit short, will be expected when the rates are actually hiked. Probably that will be the day of capitulation.

The 17 MPs (Members of Parliament) of BSP (Bahujan Samaj Party) have already withdrawn support from the UPA (United Progressive Alliance) Government on fears of the Government’s increasing proximity to the JD (Janata Dal) and the SP (Samajwadi Party). The Government is taking all steps possible to go through with the nuclear deal without forcing the Left Front to take drastic action. I wonder if they would be able to pull it off. The Prime Minister, Mr. Manmohan Singh, is already looking for reasons to resign. While the present government falling can only benefit the country, I doubt the market will take it that positively. Probably that will be the day of capitulation.

Nobody knows when that day of capitulation will come or how far down will the markets go or how much pain is still left. But one thing is for sure, the day the capitulation comes, we shall know. Such days are usually accompanied with huge and steep declines and extreme panic. The panic will build a lot of fear in everybody’s minds. But believe me, only the courageous few who decide to buy on such a day will end up as winners. Others shall see the opportunity come and then see it go. It is important to set aside your emotions of panic and fear on such a day and be as greedy as you can. As Warren Buffett says, "Be greedy when others are fearful and be fearful when others are greedy".

I leave you today with two charts, the top being the daily chart of the Nifty while the one at the bottom being the weekly chart. Both are giving contradictory views and my views are pasted on the charts itself. The market may follow one of the views. It is also possible that it follows one view for a short period of time (2-3 days to a week) and then follow the other view. What it finally decides to do, only time will tell.

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Fibonacci Time Zones on Nifty

I’ve written a number of posts about the Fibonacci Series and the importance of Fibonacci numbers in the stock markets including a webinar on the Fibonacci sequence. A few of such posts have been listed near the end of this post.

The Fibonacci Series was given by an Italian Mathematician by the name of Leonardo of Pisa (1170-1250AD), who was also known as Leonardo Pisano, Leonardo Bonacci, Leonardo Fibonacci or simply Fibonacci. A very interesting story is attached to why he was called Fibonacci. Leonardo’s father Guglielmo was nicknamed Bonaccio (meaning ‘good-natured’ or ‘simple’) by his friends and Leonardo was called filius bonacci (which means son of Bonaccio) which was later nicknamed Fibonacci.

The Fibonacci Series is a series of numbers which starts from 0 and 1 and each of the succeeding numbers in the series is derived by adding the previous two numbers in the series. So it goes as 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 and so on. Each number is 1.618 times its previous number, 2.618 times the number before that and 4.236 times the number before that. Similarly, each number is 0.618 times its next number, 0.382 times the number after that and 0.236 times the number after that.

Fibonacci is present everywhere in nature and this video very well describes it. Needless to say, even the stock markets rely heavily on it. Elliott Wave Principle says that markets move in a direction in a series of 8 waves out of which 5 waves are in the direction of the trend and 3 move counter to the trend. Interestingly, all three numbers 3, 5 and 8 are Fibonacci numbers. It is a known principle that when markets retrace a particular move, they generally find support/resistance at Fibonacci ratios which is why the ratios 23.6%, 38.2%, 61.8%, 161.8%, 261.8% and 423.6% hold a lot of importance. A lot of material can be found on various Fibonacci techniques used in the stock markets such as the Fibonacci retracements, Fibonacci Arcs, Fibonacci Fan Lines etc. However, I am concentrating today’s discussion on the Fibonacci Time Zones. According to the Investopedia, the Fibonacci numbers play an important role in determining relative areas where the prices of financial assets experience large price moves or change direction. There are various examples which show that markets show a high range candle or change direction on the 3rd day, 5th day, 8th day, 13th day, 21st day, 34th day, 55th day and so on. Today’s discussion, however, won’t delve into high range candles but will only concentrate on change of direction.

Before I go deeper into the subject, I would very quickly like to emphasize how the Fibonacci numbers affect the markets naturally. A week consists of 5 trading days (a Fibonacci number), a month consists of 21 or 22 trading days (21, again being a Fibonacci number) and a year consists of 245-250 trading days (being very close to the 233 Fibonacci number). Interestingly, a year has 52 weeks (very close to the 55 Fibonacci number) and 8 weeks consist of 56 days (close to the 55 Fibonacci) and 8 months consist of 240 days which again is quite close to the 233 Fibonacci mark. So, Fibonacci occurs naturally. Nobody had any real intention of making the markets respond to Fibonacci numbers but they naturally do.

I have the weekly chart of the Nifty above, and on it I have drawn vertical lines where a significant market top or a market bottom was formed. Then I have calculated the distance between the top and the next or the previous bottoms and written the number of weeks taken to reach the next low/high. As can be seen from the numbers the market has been consistently making use of Fibonacci numbers like 3, 5, 8, 21 (on some occasions it has deviated to 20 or 22 also) and 34 (though, on one occasion it took 35 weeks) to turn around right from the low formed in May 2003 till Jan 2008. Another interesting thing to note is that the bull market that started in May 2003 and ended in Jan 2008 has taken a total of 55 months, 55 again being a Fibonacci number. Interestingly, the turnaround that happened in Jan 2008 and which has been continuing till now has now completed 24 weeks and is now in the 6th month which has decisively crossed the 21 number mark and the Fibonacci number 5. It means that the markets may not turn around till 34 weeks or 8 months are completed or if things do turn out to be very bad then maybe 55 weeks or 13 months. But we should be looking at the last week of August very carefully as a possible turnaround time because that is when the markets would have completed 34 weeks of a downtrend.

But what about the downside? How low can go the markets go? Let us make use of the Fibonacci retracements this time. The Nifty made significant lows of 599.51 in March 1993, 800 in Nov 1998 and 920 in April 2003 and a significant high of 6357.10 in January 2008 (I can’t help noticing that these are spaced more or less 5 years apart, 5 again being a Fibonacci number). Calculating the 38.2% retracement levels from these different lows to the same high of 6357, we get the support levels of 4280, 4234 and 4157. These are some of the levels where the markets should eventually find support.

I heard an analyst speaking on TV a few days back who was saying that after a long bull market a correction in price as well as time is required. He was saying that we may have seen two thirds or more of the price wise correction but have seen only a third of the pain. He said that in the weeks to come, the price may not fall too much but a lot of pain will be there, which is imminent if the markets were near the support and the bulls and the bears continue to fight near a particular level trying to decide what an appropriate bottom for the market is. Even after the bottom is formed, the pain will not be over since, then the market could go into a long period of consolidation and base building before a significant recovery in price is seen. If this were to be true, we may see a bottom being formed in the last week of August 2008 but a significant price increase (maybe a breakthrough above 4700 or maybe 5000) may not be seen for the rest of the year.

We have tried and have made an effort to analyse what the market may do but, ultimately, the markets have a mind of their own and can prove us wrong anytime. We have to be quick and humble enough to accept our mistakes and change our stance if the markets were to prove us wrong. On the other hand, if the market does move according to our wishes then we know the price levels and the approximate time where we can be more careful and decide whether the market has a mind of proving us right or not. As I said, technical analysis is all about the probability of profitability.

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4th Wave of Corrective Wave C Seems to have Ended

Finally, I’m back after a long break but can’t say for how long! I’ve had a pretty bad case of an infection which is just refusing to leave. After 4 days of antibiotics being injected into me, the high fever ranging between 103-104 degrees Fahrenheit seems to have relented. But I’ve also been having this real bad pain in the back (which, according to the doctors is related to the infection) which gives in only to painkillers and that too for only 4-5 hours. The bad part is that I can take the next doze of the painkiller only 8 hours after the previous doze and the last 3 hours are just unbearable. Today, I have taken the painkiller about 3 hours ago and I have about another hour or so to finish before I start getting the pains again. Hope I can finish what I have to say in that much time otherwise I’ll have to just upload it midway. So please excuse an abrupt ending to this edition, if there is any.

Seen above is the 30 minutes chart of the Nifty. As per the last analysis that I had done I had suggested that if the Nifty were to go above 4560, it could go on to find resistance at the 38.2% Fibonacci retracement level of 4675. It just so happened that the Nifty made a high of 4673.10 today before it changed its direction and started its move down.

Let us take a look at the daily chart of the Nifty and also look at the previous Elliott Wave Count analysis done on 3rd June, 2008. This analysis had talked about the Nifty being in the corrective wave C in which the waves A-B-C are following the 3-3-5 formation which means 3 waves each in waves A and B and 5 waves in wave C. The Nifty seems to be moving as per our analysis and now seems to have completed wave 4 and has probably started the fifth wave down of the corrective wave C today. The end of this wave shall signify the end of the bear trend. Considering this 5th wave to be as long as the first wave of this corrective wave C, we get a minimum target of 4295 and maximum of 3882 for the end of the 5th wave. Anything outside these levels would signify that our wave counting has gone awry. I, personally, am looking at a target in the vicinity of 4100.

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