Nifty : Testing Mr. Elliot

To start with, the rounded reversal hypothesis described earlier fell flat face as Nifty took support at 4950 and bounced. The enormous short that got built during the fall, started covering once Nifty moved over the 5050 resistance. Very soon Nifty crossed 5100 and touched intraday high of over 5150 on 23rd Dec. The next day though Nifty moved sideways for better part of the day, second half saw more short covering which took Nifty to new 2009 highs of 5198. I wonder if bears can have faith on 5180, as Nifty closed marginally below it. 29th Dec should again be a good day to start with, but it remains to be seen if Nifty can cross 5180 and 5200 resistances. But for sure bulls will be incharge and any hopes of seeing a sell off is more than a wishful thought.

Last 3 trading days of the calendar year, hardly invites major interest and it promises to be a tepid end to an eventful year. The beginning of which was marked with Satyam catastrophe, Nifty was tied to 2500 which now seems to be a major bottom, we saw an upper circuit on Nifty and had record breaking volume days.

Now that the earlier scenarios have failed, lets see if something can be salvaged out of it, or we need to frame a new structure. In the chart above, 5182 touched in October (labelled as [5]) should still be valid. There are many characteristics in that wave that makes it so, namely Ending Diagonal pattern and more importantly a wave up after the momentum high wave. Anyway till this pattern is not totally violated lets stick to it. The 4539 low then should be treated as the end of wave A and the current upmove as the Wave B, which basically is the structure I have been sticking to. The only major change that would occur is that the flat ABC correction would be a more complex one.

The rise from 4539 (labelled as [A]) should be the counter-trend wave B and hence should be a 3 wave pattern. First of which ended at 5138 marked as [i], second ended at [ii] and the third is in progress. As this is the motive wave it should be a 5 wave structure, which we can assume to have started from 4807. In that case wave1 ends at 5183 and wave2 ends at 4944 and what we are left with are strong upside wave3, a modest corrective wave4 and another upmove of wave5 which should end with negative divergences.

Taking this into consideration I come to the following MINIMUM targets:

wave3 which is under progress should take Nifty to a minimum of 5320

the deepest of correction should bring it back to 5130

the last upside move can take it back to 5360

The reason I am taking the most modest of targets is that a flat ABC correction is valid only till wave B is at most 138% of wave A. This level comes to around 5430 and any move above this will completely invalidate the theory of this being flat ABC correction. Another resistance to be noted is 78% retracement of the fall from 6350 to 2250 which is around 5470.

So in my opinion Nifty looks bullish currently and a target of 5350 can be achieved in near term, which could be as early as mid January. Movement above that is surely going to tough, though we can see Nifty in 5400s with some good luck and good news. Any move into 5500s would surely make things ultra bullish and we should see Nifty flirting with all time highs of 6350. Corrections on the other hand after touching 5300s could take Nifty to as low as 4300s. This correction if the wave count is right should happen in 10 to 17 days as Wave C has direct relationship with Wave A which was nothing other than sharp!

The end of a long term uptrend is always marked by heavy retail volume, violent corrections and euphoric rallies, extreme values of PCR and a general bullishness about economy and stock markets. Some of these things are yet to be seen and hence all my correction hopes are getting thrashed. Lets see what we get in coming days, does things occur as Elliot Theory allow us to anticipate or this is yet another futile attempt to predict the market.

Stock Idea : OnMobile Global

Stock Idea : TVS Motors

Stock Idea : KS Oils

Paul Kedrosky "Contrarianism is the New Consensus"

It rarely pays to be contrarian. For the most part trends go in the same direction for some time – that’s why they’re called “trends”.  Whether it’s real estate prices, credit card debt, Treasury issuance, or Croc sales, they can continue along implausibly for far longer than you might think, sane and right-thinking and sober-minded sort that you are.

But contrarianism can work sometimes. When? At inflection points, mostly, when the trend is exhausted and can do nothing but reverse. It can then pay immensely (c.f., John Paulson) to take the other side of a cemented consensus. The trouble is, it’s just about impossible to pick such inflection points – lots of people went short residential real estate well in advance of Paulson, only to lose oodles of money.

Given this, why is contrarianism so appealing? It is appealing – and growing immensely in popularity – because it has so much smart-guy frisson. This naive contrarianism lets you pose outside the system, meanwhile keeping good company like Warren Buffett, John Paulson, the Freakonomics fellows, and oodles of self-declared fellow travelers, most of whom almost certainly aren’t doing what they say they are.

Contrarianism also appeals to our increasingly cynical nature. It is the superficial idea that most people are wrong about everything, especially if they are in government, on TV, among the putative intelligentsia, etc.They think that? Ha, I’ll take the other side, etc.

I was reminded of all of this earlier today in reading a piece in NY Magazine about the past decade’s burgeoning business of writing contrarian books & articles. The topics were wide-ranging, of course, including everything from car seats (they don’t work!) to presidential sloth (it’s okay!) to the environment (it’s all good!), to gravity (overrated!  [ed., You made that up]), but the upshot is the same: The consensus is wrong. It is to the point that as soon as something is consensus you should start a mental countdown to the day when the inevitable contrarian take shows up.

The trouble is multifold, however. First, contrarianism mostly doesn’t work – trends last until they don’t, which is often a long time, especially in a world of tight-coupling and information cascades; and long-lasting trends crush smarty-pants contrarians like bugs the whole way. Second, the consensus is more often right than the anti-consensus consensus likes to think. Call it wisdom of crowds or whatever you want, but the consensus isn’t that dumb, most of the time.

As I am stubbornly fond of pointing out, given all the flaws in human decision-making pounced on by behavioral finance sorts, decision theorists, psychologists and the rest, you’d think we humans couldn’t cross the street successfully, or invest or raise kids, or, say, wander along as a species steadily getting healthier and wealthier for a few thousand years or so. And yet, here we are. Easy and naive contrarianism about everything has become the new consensus – and that is a kind of bigoted and dumb consensus around which I’m happy to go the other way.

Stock Idea : Infosys

Nifty : Crude way?

Lets look at crude first which has dropped a lot after forming a ranged top in the $77-$82 region and since has been declining consistently to almost $70 level. What we see in the chart is the formation of a Top after hitting $80 level regularly which it found pretty difficult to cross. Failing to cross a resistance is a very strong sign, that prices will go down (maybe significantly at times) and then reattempt to break it.

We see a rounded reversal pattern here which looks to end only around 65-67 levels. Prices currently are in a very bearish orientation and hence can go lower from here.

Now lets look at Nifty chart above. Here as well we see multiple attempts to break the 5180 resistance. And if sentiments remain positive but conviction to buy at higher levels do not come, we can expect to see Nifty decline in the same way as we see Crude Oil decline above. Which would be slow initially and picking up pace in latter phase. Though predicting the time frame in which this flattish range breaks is almost impossible.

I have been reading, hearing and even writing about the more probable outcome of a ranged trade which is a fast and fierce in either direction. Markets love to surprise, who knows we will never get the sharp movement which we are expecting on the breach of 4950 or 5200, but get this slow movements and pick pace when we least expect! The idea is not to stand for a view but to be open to all and position yourself aptly!

Gold : Buy or Wait?

The recent rise in the dollar, which was considered a bearish sign for equities and commodities isn't playing to perfection. On one hand we are seeing the S&P500 as well as Asian markets moving within a range, threatening to breakdown at times and breakout on others. On the other hand commodities which are more direct play nowadays to the dollar is showing the inverse correlation to some extent.

Crude which was trading above $80 has slipped to near $70, even when there has been supportive news of economic revival and less job cuts! Gold's fall has been even more pronounced as it has been a lot quicker (from 1225 to 1115 in just over a week's time). And only reason that can be associated is dollar's rally which has shaken off the weak hands. Will the dollar rally more and push gold's prices even lower, or has the gold reached strong support zone from where it can target higher levels remains to be seen. Let's have a look at what the charts say. In one of my previous post Bank Nifty : Reversal of Trend I pointed how "trend arc" breaks and similar pattern is getting formed in Gold.

In the chart above we see how gold started rising in a parabolic fashion and then broke from the trend arc support to keep falling. We have already broken the short term moving average and hopefully find support around the medium term moving average. The MACD shows that we have made a new high in negative momentum, it generally points to further lower levels after a brief rally. But one definitive thing that comes out of the chart is that gold too had been a playground of speculators off late. Strong rally and even stronger corrections are signs of leveraged activities. Only time will tell us how much of speculation was going around in the name of "hyperinflation".

Now take a look at the chart above. What we see is another parabolic rise in the chart of Gold, the only difference is the time frame. This weekly chart of Gold shows some kind of absurd rise since March without any meaningful correction. One can argue that so has done the equities, but remember this is not a sign of a healthy trend. One can expect the retest of $1000 levels which had been a resistance earlier at some point of time. Surely should be a great buy then.

I am not suggesting that gold will have a major correction, but the chances of it going higher from here are quite low compared to chances of it going lower. Buyers short and long term should be wary and definitely resist the temptation if it goes below 1100.

NIfty : Trin in Support Zone

For last 20 trading days which means almost a month Nifty is in a tight range of 4950 to 5150 if we consider the closing prices. This kind of range bound trading as experts say cannot carry on for long. Either the bulls or the bears will finally give up and the market which has been suffocated will break free, the move can and should be a fierce one, in whichever direction the market decides to go. I am sure readers must also have noticed that US market is also in a tight range. Have not been tracking other markets but I guess it should be more or less the same for all of them.

This uneventful though interesting phase of trade is definitely good for option writers, where a "Strangle" pays them handsomely. But it can kill you if you do not have appropriate stop loss, as you know one leg of the Strangle can give you enough loss to take away months of profit.

Lets focus on the TRIN chart which has started giving some "confusing" signals. Firstly what we see from the blue arrow is that though the TRIN was rising, Nifty kind of moved upwards. Later from the start of red arrow Nifty has virtually not moved at all but the TRIN has fallen quite dramatically! Both these observations are against the classical belief of "rising TRIN is bearish and falling TRIN is bullish".

Next point to be noted should be that TRIN is back into the support zone of 0.55 to 0.7, so we can be forced to think that TRIN should bounce from here making Nifty ideally go down or atleast go sideways, but definitely not go higher, unless something which happened around the blue arrow happens again!

I am not going to stick my neck out this time to predict where we are headed, from this point, but people interested in betting on markets (with getting a kick out of life, or living on the edge etc kind of attitude) can surely buy 5100 Calls and Puts simultaneously. If this breakout or breakdown has to happen in December (there is a large probability) then I am sure gains would be worth flaunting! The target of this should be 5350 on a breakout and 4750 on a breakdown.

Coming back to subject, as TRIN values for any particular given day can be very absurd, we use 10 day SMA to cut the noise and show some kind of trend. So for each day we drop the last day TRIN value and add the latest one to get the 10day TRIN SMA. Interestingly we have dropped a low TRIN and added a high TRIN but still managed to get a lower 10day TRIN SMA!! Are we missing something that eyes dont meet or are we being fooled by randomness!

Stock Idea : HUL

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.