05 December 2009

Nifty : Bearish Drums Again!

I don't know why but i keep getting reasons to be bearish again and again. Maybe I get more pleasure in finding reversal patterns than in continuation ones. I would rather enter a trade early than join the herd much later. So in this bullish environment I like being pessimistic.

Last night was enthralling for a bear. US jobs data was pending and Dow futures was cautious but optimistic and was trading at +25. Soon an unexpected positive surprise came and there were talks about how economy earlier and now jobs have bottomed out. Dow had shot up to +115 with the breaking news. After market opening of +100, Dow kept rising and threatened to blow out of 10500 resistance trading at almost +150. But soon came something more unexpected, the "frail" Dollar too started moving up, on fears of limited days of near zero interest rates. This started putting pressure on Equities as well as Gold! Incredibly Dow almost fell to -50 in an hours time. Gold ended the day almost at -5%, the highest fall in recent memories. If you see the volume of US markets its far more than current averages. Crude Oil as well was having a bad time but not as much as Gold.

So what can we make of what all happened in a single day. Good news is no longer good for stock markets, which means there is very limited upside left, if any. If such a good news cannot lift the market, imagine what an unexpected bad news can do. But as we know stock markets are much smarter (most of the times) and we can say some amount of interest rate hike in coming quarters has already been priced in and maybe will do some more in coming days. The dollar though was looking on the verge of collapse never really went below its previous lows. There are lot of big players supporting dollar at lower level, though they never admit it on CNBC! If all the recent fall in dollar had been due to shorting (dollar carry trade etc) we can see a huge short covering rally.

If that happens we can see all risk appetite and liquidity going out from commodities and equities. Yesterday we got a glimpse of that in Gold's price action. A 5% drop certainly meant that there was huge speculation and hype around, and all weak hands had to cover their position. I am very glad for the people who sold Gold contracts over 1200 dollars, when talks of 1500 was doing the round, and they were and will be aptly rewarded. And this is why I love being on the other side, when they profit they do it with style! Talk about the guys who made money in the housing meltdown!

Anyway, lets see how things can impact us if last night was really a turning point. Lets take a look at Dollar first, we see a big white candle going far above the 21day EMA and almost breaking out of the channel. If on monday we dont see a fall in dollar and in coming days a drift back into the channel we can safely say that there is more upside to come. The lower black line if considered gives a falling wedge impression, minimum target on its breakout is 77.5! I have not labelled but dollar seems to be completing a 5 Wave down structure and is ripe for a pull back. How much its going to be remains to be seen but a target of 80 for medium term can be expected. We also see positive divergence both in MACD and RSI, surely some sort of non confimration in the trend. Which means the fall has not much of strength to carry on and we can see some sort of reversal.

Now lets focus on Nifty's price action. Since my last post after Dubai scare, Nifty kept going higher and in last few days was struggling to close in positive territory, despite positive cues from global and currency markets. And in doing so what it achived is even more encouraging for bears! I have labelled the wave count as per EWT, and what it suggests is a flat ABC correction. Which means that the next price action should be a Wave C down with a minimum target of 4540 the previous low. It would be appropriate to add that the above pattern also translates as a "Double Top" but will come into picture only when 4540 support is broken, the final target in that case would be another 600 points lower and around 3900. But lets take things one at a time and first focus what if this possibility goes wrong.

So I will keep a track as to how world markets are doing, are they encouraging for India, will the good job numbers come into play again and propel rally in US markets? Is there more liquidity waiting on the sidelines? How is the dollar getting treated above the trend line? Is it a bull trap and dollar has to test it previous lows of 72? Is Nifty getting ample support at 5000 to surge ahead for new highs? We have supports at 5000-5030 and then 4800, is the Nifty showing lot of respect to them?

Above listed factors are surely things to watch out for if you are a bear or hold positions in risky markets (equities , commodities). Beacuse in life and in markets you never know what lies ahead.


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