Nifty : Crystal Gazing

I am being a bit wild here in today's post just as the Stock Markets around the world. Typically the day after expiry which always is a Friday tends to be a slow trade day, where big players just chill and enjoy the spoils of the previous series, watching poor retail investors and traders struggle among themselves trying to move Nifty by 10-20 points! But I am sure the overnight news from the Middle East mostly known for its exotic hotels and duty free shopping would have spooked them, ensuring the beer had to wait a little longer.

Nifty opened 100 points down straightaway and slided almost another 100 points, with 300 points shove off in a matter of hours it was obviously damn oversold. Traders not realizing it would have been caught in their "shorts". So what we get is another 150 points though in the other direction. Almost a week's swing in a single day! What I personally have learnt from today's price action is that we cannot take anything for granted, I could have easily sold 4900 Nifty Calls when it was at 4800 expecting to make a decent gain in coming days and end the day almost at 200% loss, a trade going horribly wrong!

Anyway coming to Charts and Technical Analysis, today's candle has a long tail below showing buying (short covering) taking place till the last moment we can expect this bounce to continue maybe till around 5000, but should be facing significant resistance at 4930-4950 levels which acted as good support earlier. I consider 21day EMA as a very good indicator so would be betting on not crossing it on closing basis.

Coming to the chart that I have shown, though its very early days for it but the pattern is getting formed almost perfectly. The Head and Shoulder pattern is one of the strongest and most reliable indicator of a trend reversal. Instead of going into the details of it, I would like to point that it confirms the end of a 5 wave structure and suggests a meaningful correction. As per the chart we can see Left Shoulder, Head and Right Shoulder, now if Nifty breaks the neckline and that too with good volumes it surely means the end of the "bull run". I feel in coming days the level of 4700 on nifty should be watched very carefully, this is where the neckline support would be in around a week and a half time.

I have rechecked my H&S notes to see if all the indicators fall in place, and to my surprise they do! Be it left shoulder within the up trendline, volumes increasing in left shoulder and then decreasing in right shoulder. But surely we can get mistaken so a confirmation of neckline break is of utmost importance for this hypothesis to be valid.

So what if this is a H&S pattern. The break of neckline around 4700 region with volumes would give us a minimum downside target of 4700-700=4000! Though we can expect a bounce from oversold levels after breaking the neckline which should be resisted at the neckline. I am talking about very distant future but that's only my concern for this post. So if things fall in place, I am sure december and early january is going to be a period to watch out. Historically not much happens in this holiday period across the globe, and for the above reversal to happen I feel we would need good participation. Lets see how this unfolds, but chances are that the fund managers are not going to have a relaxed vacation.We have 20 days to trade in december and the way situation take dramatic turns overnight, its not a distant future what I am talking about. Lets see if Dubai Debt issue proves to be a trigger for sell off or a start of a new crisis or who knows another false alarm giving opportunity to buy.

Nifty : TRIN view

For last few days we have been seeing Nifty rallying even though there is lot of skepticism around with "experts" first pointing 5000 and then 5100 as strong resistances. The funny thing about market is that disbelief related to a particular move is an ideal condition for it to play along.

So if on Friday the only move I and a whole lot of "Shorters" expected was down or a minor bounce which would be sold off, we were surprised by a strong move from 4935 to 5070! We also have been feeling that way since March, when all that was between Dow 6500 and Dow 5000 was TIME! And since then most of us have painfully seen the stocks rise in an unbelievable way, majority of the them multiplied by a factor of 5 to 8. Well my point in reliving the pain is to point out how extreme sentiments in Investors affect the Market.

Coming to the Technicals; though the Nifty has been rallying from the 4540, it has been doing it with some negative divergence. Apart from it the only other bearish indicator left is the TRIN. TRIN for those who are unaware about it measures the ratio of money flowing out of a falling stock to the money flowing into rising stock. TRIN can be calculated only for an Index. Moreover day to day values of TRIN swing wildly, so normally a 10 day simple moving average is used. Bottom line is that a rising TRIN is bearish and a falling TRIN is bullish.

The chart above shows the recent TRIN and Nifty relation. Look how at A and C the rising TRIN had bearish impact on Nifty. Interesting to note is that how at B the small rally in TRIN was negated in effect. The current rally initially had TRIN falling but suddenly we see that though Nifty is rising the TRIN is also keeping up. The reason definitely being the rise not having large volume or only a few stocks are propelling the rally. Whatever it is, one thing for sure is that the rally is not having great legs to run on.

The another thing to be noted on the chart is how 0.6 to 0.7 has acted as a decent support of TRIN having just a single "throw over". If this level has to hold we cannot expect any major broad based rally in the Nifty before having a decent correction.

One more point which I note but am not sure of is the green trend line of the TRIN. We can see how apart from a June aberration the trend holds on. The doubt that I have here is that can something which is a result of trading and not trading itself follow Technical patterns? But if support on such a thing can exist so should trend lines. I would like to know what other readers think about it.

Assuming TRIN to also follow these patterns we see that it is forming some sort of "Descending Triangle" which classically breaks on the downside, though not always. Which ever side it breaks we can expect some large moves in Nifty, my guess would be an early 2010 boom or bust. There is an eerie similarity between the CBOE VIX and TRIN. Lets decode...

Bank Nifty : Reversal of Trend?

After the recent steep correction and a V shaped recovery in the Indian markets, talks of breaching the recent top of 5182 have resurfaced. I have started hearing 5250 as the next target and many "analysts" are finding hope in the recent Dow's movements which has taken it to new highs of the calendar year. I am sure these analysts are aware that different markets around the world "Top" at different time but choosing to ignore.

As of this bear market and recovery, China is the leading market having bottomed first and most probably even topped first. Indian markets are bit behind if we consider recent highs to hold, and in that case US markets are the laggards.

This aspect even works for different sectors in same markets. So for Indian markets we can say that the Telecom sector may have topped first, though we don't have any Index to follow that and may be even Realty. Its always a great place to be in if we identify a sector which is leading the overall market. Finding technical reasons to identify "Tops" and "Bottoms" in it can give us huge advantage in betting on other sectors that are playing catch up as we know how they are going to behave.

Lets take a look at the Bank Nifty which after having a phenomenal run has shown signs of exhaustion. Take a look at the "trend-arc" which initially was rising at a nominal slope, started rising almost vertically. Obviously this was not sustainable and it had to give way at some point. We see a break from the trend and now it is struggling to even attain those levels. This is a clear sign of buyers becoming reluctant. If we take a look back crude oil also made a rising arc before getting reversed and it seems that gold is currently doing the same.

Now lets have a look at the bottom panel of Mass Index, which I have hardly seen being used by many. What this Index most accurately does is predict reversals. (You can google to get the theory and calculations behind it.) The criteria for Mass Index to indicate possible reversals are:

1. The Mass Index going above 27 (red line) and then falling below 26.5 (blue line)

2. 9 day EMA line point upwards, (if it points downwards with above condition met, a reversal on the upside is possible)

We clearly see the above conditions being met, so we can safely assign a higher probablity to the reversal, than this to be a false alarm. Fundamentally as well Banks are not in a very great position, with Inflation rising and hike in Interests rates fears being the prime concerns. Moreover interesting this about initial phases of a reversal is that it looks like profit booking! So the stocks and sectors which have given the highest return starts the correction which is a fast paced one.

So is the Bank Nifty a tad ahead of the overall market in signalling a possible reversal? Only time will tell, but we have seen in past that how swift and "time-wise" efficient the global markets have become. If this is a reversal scenario then we will not see Bank Nifty to reach previous high though it is not far and maybe see a stronger correction in the next leg of fall.

Now the other question is if Bank Nifty has really reversed what happens to Nifty. Banking have around 17% weightage so it is quite hard to imagine Nifty going higher with such a huge part of it underperforming.

For more enthusiastic readers SBI has also given such a reversal signal among the Banks.

If you take me seriously consider shorting it !!

Another Reason for 3900 Nifty!

Not much to write about, as I feel the chart itself is doing a lot of talking. As I have pointed out earlier, the rally that we are witnessing from 4540 can carry itself to 4860 and then 4925, which should end the Wave B and another slide to a minimum of around 4500 should be expected.

The expected fall (Wave C) can be a time taking process, the maximum target of which should be around 3900. What would drive such a large correction (almost 1000 Nifty points) cannot be only profit booking or something very technical like overbought conditions.

In my opinion the reason for the fall would be the reason for its rise, which is The Dollar Factor. The Dollar chart from June shows, that we are at almost the fag end of its downtrend in short term and it can reverse anytime now. For equities and commodities world wide its like unfurling the victory flag, at the apex of a volcano ready to erupt. Crude Oil for example is already forming a topping pattern and Gold on the other hand though is making new highs, looks in a final burst before the collapse.

The counter argument I always hear is that, the Fed is not at all in mood of doing anything to strengthen the Dollar, and which means we will remain in this kind of free money environment for much longer period. That may work for long term outlook, but in short term, where not only sentiment impacts trading but also trading impacts sentiment; I guess we are going to see a 15-20% counter move in Dollar pretty soon.

Nifty : What after the oversold bounce

After the carnage on Tuesday, Wednesday saw Nifty regain all the losses and Thursday was a day of dramatic turnaround led by short covering. Nifty was having good support at 4600 and that triggered shorts to cover. We all know that markets never move in a straight line and the zig-zag price movements kill traders on both side. So when money making was getting easy by shorting, we get these bounces which are extremely hard to catch for anyone who plans to get long.

In the morning I heard "experts" talking about Suzlon being the weakest Nifty stock and chances are there for it to totally breakdown and reach to 40 within few days, it closed on 55 the previous day (a fall of over 25%). I immediately calculated how much money I can make by shorting a single lot of Suzlon. As my broker never allow me to exceed my margin I kept ruing about how many such opportunities I am missing every day! Guess what Suzlon was 3% higher when Nifty was almost 100 points down for the day and closed 13% higher and I am sure there are more such days to come, it will start falling again only when all the shorts are cleared off the system! The point that I am making here is that we can rarely catch the counter-trend moves, so the best tactic a trader should approach is to get out of markets way.

Coming to Nifty, what we have seen in last two days and maybe see tomorrow as well is one of these bounces from oversold levels, which is having support of good news (scaring the shorts even more). If we get some gap up opening in the vicinity of 4800, we can see Nifty rally much higher, cleaning whatever shorts that are left or might have been created today. 4860 should be a good initial target to keep an eye on and 4925 if that breaks.

But the higher levels we reach, steeper the fall can be from there. Because in my opinion the uptrend has been broken and we have to see levels lower than 4540 to justify the new negative momentum high that has been made. As per chart and new Elliot count we have ended the uptrend at 5182 and made the wave A low at 4539. Wave B should take us to a minimum of 4860 and then Wave C should take us lower from there. The expected amount of fall is a very large range (400-1000) points. So what we can for sure expect is a test of 4500! Would we test 3900 lows.. well I don't know the answer, but hope the chart would foretell...