24 July 2011

Risk = Opportunity

The reason you take a risk is because the opportunity that it provides.  But not all risks are created equal. There are good risks and bad risks. There are risks that you want to take and risks that you are forced to take.  There is risk of not taking risk. The way you feel about risk is partially determined by when you think about it.  Without risk we would have no opportunity.

Rupee to Rally

As in my previous post I pointed the expectation of a rally, I am trying to look at other charts as well to support the view. The Dollar-Rupee chart very well supplement it!

edit: added the above chart with levels!

Nifty : Is Breakout Inevitable?

I am doing a post after quite some time, but as the market has not done a whole lot, I think the readers would not have missed me much (just bragging a bit!). In my last post I expected Nifty to move higher from the closing level of 5660 but instead it fell to 5500 and since then is stuck in a range of roughly 5550 to 5660.

If you focus on the recent action that I have talked about, you see how the past 2 weeks of trading has been done in a tight range and possibly in a triangle. I am a firm believer of Elliot Wave Theory and rely heavily on it to base my expectations. Triangles generally occur in 4th or B waves. I am expecting this to be a B wave of larger wave 2. Which means that wave C is still pending which should be around 250 points (as A was of that measure). So a correction from 5650 should take place and should be ending around 5400 or thereabout. After which the larger wave 3 should play out, which I hope will be able to break the downward sloping trendline, which has been a menace for the bulls. Also as I have marked, this will be the 3rd wave of even larger 5th wave and should take Nifty to new all time highs. (too bullish eh..!)

Let me explain why I am arriving at this conclusion. While there are innumerable counts (both bullish and bearish) that one can label the current structure. I am just focusing on the last leg of rally from 5200 to 5700+, which clearly has a 5 wave impulsive move. Now had this been a corrective wave up, it should have done it in 3 waves.  The other scenario can be, this being wave A of a 3 wave upward correction, leaving the option of wave C rally still to be played out. If this wave C rally pans out, it has a potential to rally to a minimum target of 5750 if we consider B to be restricted till 5400. Now I can't imagine Nifty rallying past the downward sloping trendline (which has resisted its move 3 times already) and falling back again. The breakout from the trendline if it happens should be a violent one, very similar to the one we had in September last year. It may attract a lot of volume and will perfectly fit the 3rd wave criteria.

Now let me try to frame a story which will fit this kind of count! For a 15% rally in Nifty that I am trying to build here, there must be a global picture. What we are seeing these days is a totally confused overall macro. Earnings are either in line or better than expected. European sovereign concerns are popping up every now and then and all of PIIGS have done their share of market scare. US debt ceiling issue and prospective downgrade has not spooked the market yet. There is enough worry to make the market climb on it, and who can forget the prospect of QE3! A look at the chart of oil/copper and gold can give us a better picture of where the equities of the world are heading. Obviously Nifty cannot rally alone, so we can expect the risk trade getting on again.

To conclude, what happens in future is nobody's ability to predict. But this ability is what man has been seeking for thousands of years. Being prepared is what one can do and I am sure rewarded he will be!

09 July 2011

Nifty : Where is Divergence ?

This week had been quite an eventful, even though the end result doesn't show much. The week started with three dull days then Thursday's rally took everyone by surprise and today it was an anti climax! Though its too early to write off the rally, the way Nifty reacted to 200 day moving average, would be very disappointing for the bulls. Also, Nifty broke through the downward sloping trend line on Thursday, but fell back below again. Saying that, we need to see some follow up action of price to confirm the end of the rally. Nifty is still above the Ichimoku cloud, with the buy signal still intact.

So in all, though backdrop is positive, things are murky, with the possibility to the end of this spectacular rally. When we need to check for reversals, its important that we look for divergences in the charts. Almost inevitably we will see some kind of divergence, whether its MACD, RSI, Money Flow or anything else.

I have discussed about the indicator which is calculated by plotting a 10 day moving average of difference between close and the weighted average of Nifty. This indicator has successfully predicted the major turns in Nifty since January. So we saw negative divergence between it and Nifty at January high, a positive divergence at February low, another negative at April high and another positive at June low. Keeping that in mind, I am expecting another negative divergence before this rally stalls. Apart from that only yesterday we made a new high on this indicator, which generally precedes Nifty highs.

To conclude, the fast rise that we saw in second half of last month, definitely begs for a correction. I am expecting some kind of lengthy shallow correction or a swift deep correction and then a rally back atleast to test the high made.

04 July 2011

Can we be more Stock Specific?

Though I did not received the above question as a feedback, I am trying to respond to that! As all of us know, trading only a single counter can not only be difficult, it can also be frustrating. At times there is not enough movement or the direction/pattern is very confusing. So here I am trying to resolve to these issues.

We have seen Nifty take a huge leap in last few weeks and hit the resistance zone of 5600-5700. Expectations of any more rise anytime soon is certainly very optimistic, the best scenario I can think of is a consolidation phase and then rally towards 5900. The amount of strength in the market is certainly making me keep the quick retracement option a less likely scenario.

So with this backdrop where Nifty itself consolidates, keeping market participants bullish, we can expect the second tier stocks, most famously called midcaps to outperform the Nifty itself. These stocks have been beaten down in the fall to 5200, but could not rally as much as Nifty. So these counters are certain to play a catch up now.

I am attaching a list of very oversold stocks, which is calculated based on their distance from 200 day moving average. This distance is expressed in percentage. These stocks no doubt are weak, but they can give exciting rallies, mostly based on short covering.


Selection of stocks should be based on other parameters as well, like proper base formation and volumes on up days.