27 September 2009

L & T : more upside possible

As the Nifty is not doing much and while I wait for any significant correction, I tried some "deep dive". While going through major sectors I noticed that the Capital Goods space actually has been very quiet amongst the recent jubilation of Nifty touching and closing 5000 mark.

I went through the charts of BHEL, Reliance Infra, ABB and few other big names in Infrastructure / Capital Goods space, noticing all of them spending time in sideways consolidation. A closer look immediately suggests that they have completed wave 4 correction after making a wave 3 high and now ripe to go higher than their previous recent highs.

Lets check the L&T daily chart for further study. What we see is that wave 3 high of 1700 is followed by a wave 4 low of 1325. One can also see a upside breakout from the triangle at around 1500. The minimum target for which is 1800.

As for the waves; it definitely seems to be a 5th wave starting from the lows of 1325, where we have low participation and negative momentum divergence. Within this 5th wave we should have another 5 wave structure. 1st of which looks to be ending at 1620 and 2nd ending at 1500, look how we get the retracement back to the point of breakout!

The current wave is the 3rd wave and should atleast be as long as 1st wave which gives us a minimum target of 1820 and a more likely target of 2020. May be we get some correction in between which would generate more interest in this counter.

Now the big question is which I am more interested in is what happens to Nifty when L&T having almost 8% weightage moves around 25% from here. And I am sure if L&T moves it will take other Infrastructure / Capital Goods stocks namely ABB, BHEL, Reliance Infra and Siemens along with it which together contributes 13.5% (L&T included).

So will it be a broad based rally where Capital Goods which have underperformed in recent rally participate or will it be Capital Goods shining while others take rest or correct. At times we see sector rotation, which can well be the case and we can see these stocks catching up while Nifty just being in a mildly positive mode.

But one thing which can definitely be said about Nifty based on these stocks is that we are still to see more upside and we are closer to a small rally than any significant correction. I would definitely suggest people to be overweight in this stock than chase price of something which has already made a new high.

19 September 2009

Nifty Wave Counts

Lets take a look at the Nifty wave counts as of week ending September 18th. I have taken the lows of previous correction as the start of the new 5 wave structure.

0 = 4353 ; 1 = 4744 ; 2 = 4577
3 = 5003 (possible end of wave 3, if rally continues without correction to a minimum of 4840 this scenario fails)

Taking a look at the chart we see that wave 1 is having a length of 391 points. Wave 2 is of 167 points a 43% retracement, satisfying the condition (between 38 to 78% of wave 1). Elliot principle states that Wave 3 cannot be shortest of impulsive waves and hence wave 3 should have a minimum length of 391 points in this case. Which is taken care as September 17 high of 5003 gives us wave 3 of 426 points.

Now considering wave 3 to end at 5003, (though it may not be the case and Nifty can rally higher without any meaningful correction) we expect corrective wave 4 to take Nifty to a range of 4840 to 4790, and in no case below 4745.
I am forced to believe that 5003 or some higher level very close to it should be the end of wave 3 as we can see strong profit booking near those levels 5000 being a psychological resistance. We see negative divergence in MACD and CMF (shown in chart). Another reason being no decent correction taking place to take the markets strongly higher (corrections are necessary for new people to get in).

Minimum wave 5 target (less bullish scenario):
We get the correction to 4790 or below the wave 5 length becomes 62% of wave 1 giving a maximum target of 5032 in Nifty. I assign this a low probability outcome, as this violates Elliot principles for the larger structure that I am following where a minimum target of 5165 is expected from this 5 wave structure.

Maximum wave 5 target (more bullish scenario):
We get a correction to 4840, and wave 5 length becomes 162% of wave 1 which is 633 points (not possible as in this case wave 3 will become shorter than wave 5). So wave 5 of maximum length of 425 points can be expected, which will take Nifty to 5265.

But what if we do not get a correction, lets discuss it when that happens!!

17 September 2009

Reliance : Follow up

The day started with a big bang with nifty touching 5000 after a long time. Though the joy was momentous and soon markets gave up all its gains and closed almost flat. Bulls must have been cursing Reliance for turning the sentiment sour for selling off almost 5% and knocking off around 25 points from the Nifty. What happened today is the big question and even bigger is what will be the impact of today's selling.

I am sure most of the trading softwares must have signaled a "Sell" after looking at today's price and volume action. And its quite evident the stock will be under pressure for quite some time. News is that Reliance management has planned a sale of Treasury Stocks to raise capital. Now why they want to raise so much capital all of a sudden is anyone's guess. It could be that they feel after such a rally the prices have overshot the fair value and its a good time to sell some stocks. Another rumor doing the round is that they need to pay huge amount of settlement in the RIL-RNRL case! Whatever be the issue, we will come to know that within few days.

I had posted something about reliance few days back suggesting that it could be on the verge of a breakout. Breakout it did with decent volumes but after few days of rally it started showing signs of fatigue and today it made a sharp correction. We have seen prices testing support levels often after breakout but it is a sign of a weak breakout and surely one can expect the target to be much lower than calculated. Lets see if it takes support at the trend line drawn in the chart, failing to hold it would suggest a more severe correction and certainly invalidating the break out.

So the best way to tackle it would be play a wait and watch game, if it seems to be holding the support mentioned it should be a good buy and all rumors should be laid to rest. It it keeps falling surely something fishy is going on and it would be advisable to get out of your holdings if you are a short term player.

Bank Nifty : Powering Ahead

After another good day at the markets for the major indices, lets take a look at one of their major contributor; the Banks. I have attached a 3 month chart below, but if you look at its 9 month chart (to include its March 6 lows) I am sure you would be cursing yourself for not having more banks in your portfolio. It has moved from 3300 to 8400 in this period, a phenomenal rise for the symbol of India's growth story.

What we see in the chart is something which is pointing towards another leg of rally. We see a very clear breakout from the ascending triangle formation between July and early September. The breakout points to an ultimate target of 9000 while currently its just under 8400. So we can be bullish on it for some more time.

All the indicators in the chart paint quite a positive picture. The only concern for me right now is that it has become overheated. We should see some correction, which should be healthy and giving opportunity for more participants to get in.

As I am particularly interested in Nifty, and banks being one of the major sector contributing around 17% it would be interesting to see where Nifty goes if the Bank Nifty reaches its target of 9000. A simple calculation which says 600 points in Bank Nifty is roughly 350 points in Nifty, just taking there proportionate levels and assuming both move in perfect correlation it gives Nifty a target of 5300 on Nifty! Of course this is the crudest form of calculation nonetheless it tells us that we are going higher from here if things move as they have been.

15 September 2009

Nifty : Rising to Fall ?

After today's rally in Nifty which came out of nowhere; all my correction expectations were thrashed. But after looking at today's chart some hopes were rekindled. I am posting 2 charts today just to see how closely each rally is related to another.
The first chart (click to enlarge) talks about the rally we saw in July. I have marked the rally as a 5 wave structure in black. 3 waves up and 2 down and after that the correction in red. What we can learn is that the 1st wave is a very strong one and gives the MACD a big push, so that the divergences reaches a new positive high. We have a correction and another leg up, this time the divergences are lower than the previous. Again there is a correction and then we have the final leg up which is associated with even lower divergences. For all the 3 waves up, the Rate of Change which measures how quickly the stock is moving also decays.

So what we get after a 3 wave up is a nice setup for a 3 push reversal. The correction that follows is atleast 38% of length of the total move up and it can go till 78% depending on how bullish or bearish the set up is.

Now take a look at the second chart. This is the current development in the Nifty. What we see after few days of consolidation and today's rally is that we have a setup where the third and final upside is pending and if it happens with a even lower divergences and ROC, we can say that we are almost at the verge of another significant correction.

If we get few days of rally (ideally not more than 2-3 days) with not much volumes and looking very tentative and somehow manages to touch 5000, be ready for a correction in the range of 250 - 300 points. Remember counter trend moves are pretty fast and furious and should occur in 3 waves.

12 September 2009

Nifty : What Next?

I have been tracking Nifty almost second by second and to be frank any 50-60 point move would give me a heart attack!! Last four days have been as dull as it could be for the index. The only achievement it has made is a move over 4800. The bulls are happy that it is staying above critical resistance of 4800 and bears would be satisfied that the much talked about breakout above 4750 has not resulted in any runaway move.

The fact that even after breaching 4750 (which was considered as a major resistance by many "experts") the market has not made any major gain tells us that we have another resistance somewhere where we are. To break the market is buying time staying at the same level or maybe even correct to gather force to break it.

We had a very good chance to give a shot at 5000 on Thursday when Nifty opened almost 70 points up and even reached 4889 but saw tremendous profit booking for the entire day. Technically if we open above a resistance level we should see markets moving further up but that was not the case, so we can say that there is resistance even above 4889. Nifty was also very overbought at that point of time, though it is not the case now.

Take a look at the chart (click on it to enlarge). I pay attention to volumes a lot as it indicates participation and for the past four days we can see it has just been pretty much up there, with a slight hint of hesitation in participation by traders. Surely they still have a fear of heights. The MACD also shows a dip in momentum, which is mainly due to the sideways movement.

I would like to comment on CMF which measures the buying pressure, a high value of CMF points to accumulation. We can also say that strong hands are participating. It was pretty high when the Nifty moved from 4650 to almost 4750, we can again see accumulation of Nifty stocks at those levels. It can act as major support. It is also backed by the 13day and 21day EMA around those levels.

So, what to make of these observations. We see that most of the technical indicators are pointing to some sort of correction atleast to 13day EMA at 4721. If somehow the sentiment changes to a less positive one to 21day EMA at 4671. Lets see if this correction which should be a healthy one materializes or the bulls gain upper hand again. There are hardly any shorts in the market so i dont believe we can go much higher without any decent correction of atleast 100 points.

09 September 2009

Nifty : Small Correction impending

After a range bound and lacklustre day, lets take a look at Nifty's Chart. It has been a dull day where nifty moved from 4780 to 4825 just biding time for the next move. Looking at the internals, Reliance was the only stock which added some significant points to Nifty, else we would had a negative closing. As I pointed out in a previous post, seems there has been a breakout in Reliance yesterday and today also it followed up with some nice move. But this nearly 8% jump in 2 days will attract some profit booking sooner than later.

In the charts we see that the momentum is dying down, and with not much support from the global markets, profit booking can be expected. We still have not seen any convincing break of the 4790 fibonacci resistance.

So the levels I would watch would be 5day EMA which comes near 4760, a negative sentiment day can take us to 13day EMA of 4690.

Ideal strategy would be to buy on dips, as we are in an uptrend.

08 September 2009

Nifty : Time for some consolidation

After almost a straight line rise, nifty finally showed some profit booking in the second half today. The move from 4580 to 4840 have been associated with negative divergences (see chart). We can safely say that it was a Wave 5 and now we may see some consolidation (ABC). I have pointed how the consolidation may look, on the chart.

Wave A which in my opinion has started should be ending somewhere around 4710 to 4750. 
Wave B can take us back to 4780 to 4820. 
Wave C should end in the range of 4620 to 4720. 

Any move below 4560 should signal that the consolidation has ended and a new 5 wave bearish structure has started. We have 4610 as a major support and should not be violated on closing basis for the uptrend to remain intact.

My earlier posts talk about resistance of 4790, which was broken today on closing basis. Though the last hour movement signals that we still can see this resistance threaten the upside, if we fall below it in near future.

07 September 2009

Reliance: Confusion at its fag end

Here is a daily chart of Reliance, the largest contributor of Nifty and Sensex. We see that it has not touched its May 18th high even after over three and half months of trading. To add to it what we also see is that it has been making lower highs and higher lows for all these time, a clear indication that the street is confused on its fair price. The volumes have also gone significantly lower as there is not much of price movement to generate trading interests. A good tussle is going on at a price fulcrum of around 2000.

But this can not go on for ever and the equilateral triangle which is getting formed can break on either side. As per Elliot wave principles triangles are generally formed in wave 4 or in an ABC consolidation after a 5 wave structure. If the triangle we are seeing is in wave 4, then we should see a breakout which should take it above 2500, most probably 2600. If this is an ABC consolidation then things become complex, the break can be on either side and starting a new 5 wave structure. The targets cannot be calculated as calculations are based on the length of wave 1.

In any case, what we can say with confidence is that once the triangle is broken (in any direction) with confirmation of high volumes, we will see strong movement in that direction. As the width of the triangle is around 600 we can roughly calculate the breakout target as 2600 and breakdown target as 1400.

It would be interesting to see where the Nifty and Sensex go if Reliance moves to 1400 or more possibly 2600. In my opinion a 1400 Reliance means the markets have cracked and we are staring at 3500 Nifty, a 2600 Reliance would mean that we are making new highs and 5400 would be the likely valuation.

06 September 2009

S&P 500 : Bearish signs developing

Let's take a look at S&P 500 on the charts and try to gauge its future movements. Below is the weekly chart in which I have highlighted the rising wedge pattern. It is a very strong bearish development and materializes more often that not.

The volumes are taking a dip which indicates the uptrend is not having a great conviction. MACD is also showing negative divergence, backing the aspect that the index is being pushed upwards, though it is in no mood to go in that direction. the only saving grace for the upmove is the RSI which is getting stronger with the rise, indicating that we are in a trend. Given the indicators I would conclude that signals are mixed. We may keep rising for some more time, but for sure it is not going to be easy. It's time to be cautious.

As long as we are in the wedge shown above, we can expect to see a tired market oscillating between the two trend lines. In case of an upside breakout, which in my opinion is not the expected outcome, we can see a few strong weeks.

The natural outcome of a rising wedge is a breakdown and the minimum downside is the height of the wedge, which in this case is around 180 points. So a 180 point slide is easily possible whenever the wedge is broken. As we know how US markets drive the world, we can safely say that if there is no violation of the wedge in immediate future we can see trading with positive bias. So for Nifty which is my main concern should also be trading higher from current levels. But the sharp slide on the breakdown of S&P would surely pull down markets all over and we can see Nifty as well break few key supports which have developed in recent weeks.

04 September 2009

Tracking Nifty as on September 3

As per my previous post on Nifty's trend where I suggested that we can see slight correction played out pretty much on line. As I write Nifty closed below 4600 on a sluggish day of trade. Coming to the Technicals as they stand today.

We see that the trend line as well as 34 Day EMA lies around 4550, which should act as a strong support. It also represents 38% retracement of the move from 4350 to 4740. If Nifty does not hold 4550 we should get ready for some significant correction. In my opinion, this should not be the case.

We are seeing the selling losing conviction (volumes drying). StochRSI also shows that we have moved away from overbought conditions and another few days of negative biased trading will bring it to oversold level.

In the chart I have labeled Elliot wave counts, without getting into details of that: the expectations out of it is that we should see the current selling end around 4550, the deeper we go below 4550, weaker would be the bull case I am going to describe.

After hitting the support level of 4550- 4380, there should be a strong upward momentum yet again, which would find resistance again at the 4730-4750 level, this time we will break it but find another resistance to cope with at 4790-4800. If the momentum is enough to break the 4800, I am pretty confident that bulls will finally take over and we are going to hit 5000 in a few days time.

The wave counts that I am following makes this upmove a wave 3 of a larger wave 3. And wave 3 are generally accompanied by high momentum. So if things fall in place as per above, we should see few consecutive hundred Nifty points trading days.

So the ideal way to play this would be getting long on dips. The scenario discussed above fails if Nifty closes below 4350.