31 July 2010

Nifty : PCR Analysis

PCR (Put Call Ratio) is a very powerful and reliable indicator for finding out short term (1 month) market direction and range. Without getting into details, we must recognize the fact that a falling PCR is bearish and rising PCR is bullish. But we should also respect the fact that extreme values of PCR are warning of things getting overdone on either side.

Check the above chart which shows the NIfty Futures, Nifty PCR and Total PCR all based on August Series data. Though the OI would be extremely low in early days the fact that both Nifty and Total PCR were between 0.2-0.4 (very low) were signals of a coming rally. Then we see both lines moving up together along with Nifty which surely was a sign of healthy rally ahead.

Around 28th june (first vertical) we see Nifty PCR accelerating its rise as compared to Total PCR while the markets went nowhere, definitely a sign of neutral to bullish expectations atleast on the Nifty.

Things get interesting from 8th july (second vertical) where Nifty rises modestly, Nifty PCR rises but the Total PCR drops! What could be happening? My guess would be that market participants started hedging there positions by writing stock and other index call options (which make the other part of the total PCR calculation). What made them do so, well it could be as simple as the fact that market again reached the resistance area.

Now see what is happening since july 19th, Nifty as well as Total PCR have started falling. though the Nifty made a new high in the meantime. Surely looks like the rubber band has been extended too far on one side and a fall is inevitable. This divergence of Nifty going higher and PCR going lower is a very strong signal of things being not that rosy! Smart money has started getting out if not already out.

Surely things can change suddenly and dramatically in a market, more so if its equity and that too of a relatively smaller size as that of India. But keeping an eye on market internals which without doubt is deteriorating will help you from burning fingers.

Nifty : Competing Wave Counts 2

Bullish Count :
The bullish count currently places Nifty in a 3rd wave which may or may not have ended. This wave itself has the power to push Nifty to new all time high, but given the divergence and the inability to cross 5450 convincingly points rather to an end of wave 3. We can expect 4th wave to end around 5100 and then a final burst to 5500+ but not by a lot.
The divergence which has developed needs to be negated by an extremely strong upside pretty soon for the above mentioned possibility to change and for Nifty to take a shot at earlier highs.

Bearish Count :
The bearish count says that we are almost rather I should say finally done with the rally and all we can expect Nifty to do is move southwards. Note that this would be the end of a larger zig-zag upwards correction from the October 2008 lows and would mark the ultimate turning point, which CAN take Nifty to a lower low!

Both the above scenarios are based on the fact that January 2008 highs marked the end of a larger 5 wave structure and from that point Nifty is in a correction.
Scenario 1. It could be a zig-zag correction and Nifty can finally bottom around 1000-1250 range.
Scenario 2. It could be a triangle and Nifty may spend years in the range 2500 to 5000.
Scenario 3. It can also be an irregular correction where Nifty even after making a new high falls back rapidly to lower levels.

There are lots of moving parts and lot of factors that will guide where the stock market goes. India's economy though the most important factor has only a small weightage! Things will depend a lot on where the global economy is going, where the global debt issue is headed, what will happen to China which is looked upon to pull the world out of recession, which bubble will be added to list of bursts, what will happen when the currency printing stops, whether we enter hyperinflation or deflation leading into depression or miraculously we escape the punishment for the excesses we did by doing more of those!

14 July 2010

Nifty : Top ?