29 January 2010
28 January 2010
Nifty : Expanded Flat Correction?
Last few days have been very unkind to bulls, who were enjoying non stop rallies. Bears were in a shell as each of their attempt to pull the market resulted in even fiercer rally, especially in the mid cap market where rallies of 20% every alternate day in some stocks was routine.
As I have been writing the lethargic moves in the range of 5200 to 5300 resulted in a huge volatility expansion, I too read the market incorrectly as it made a failed 5th wave in the rise from 4807 to 5293.
Now it seems that the scenario of an expanded flat correction is playing out which should take Nifty to atleast 4450 if not lower in the current correction. Watch out for a 5 wave bear pattern in the wave developing. Interesting to note is that there is always a time and price relation between wave A and C in such a pattern. Which means that a fall from 5182 to 4539 in 10 trading days should be in ratio with a fall from 5293 to 4428. Rough calculation gives us a timeline of 14 trading days. We are already done with 7 trading days and the remain 7 trading days certainly do not look bright if we are to reach 4450 (a fall of another 400 points in 7 days!!)
But in markets anything is possible. As of now we are highly oversold in daily charts and there should be some technical rally of nearly 100 points so as to make way for next wave of selling. Lets see if that happens. Currently bulls who ruled the world few days back are only at the mercy of bears. Tomorrows expiry promises to be an interesting one, how much of long is still waiting to be unwound is to be seen. A breach of 4800 surely will create panic and who knows my target of 4450 will have to be revised downwards.
As I have been writing the lethargic moves in the range of 5200 to 5300 resulted in a huge volatility expansion, I too read the market incorrectly as it made a failed 5th wave in the rise from 4807 to 5293.
Now it seems that the scenario of an expanded flat correction is playing out which should take Nifty to atleast 4450 if not lower in the current correction. Watch out for a 5 wave bear pattern in the wave developing. Interesting to note is that there is always a time and price relation between wave A and C in such a pattern. Which means that a fall from 5182 to 4539 in 10 trading days should be in ratio with a fall from 5293 to 4428. Rough calculation gives us a timeline of 14 trading days. We are already done with 7 trading days and the remain 7 trading days certainly do not look bright if we are to reach 4450 (a fall of another 400 points in 7 days!!)
But in markets anything is possible. As of now we are highly oversold in daily charts and there should be some technical rally of nearly 100 points so as to make way for next wave of selling. Lets see if that happens. Currently bulls who ruled the world few days back are only at the mercy of bears. Tomorrows expiry promises to be an interesting one, how much of long is still waiting to be unwound is to be seen. A breach of 4800 surely will create panic and who knows my target of 4450 will have to be revised downwards.
18 January 2010
17 January 2010
07 January 2010
Hunting Value
Efficient Market Hypothesis states that price of a stock is always quoting the just value for it and all news priced in. So if a stock has recently been beaten down 40% it means that due to fundamental reasons the company has lost 40% of its value or value generation capability. Though I am no expert in this field I always doubt this theory, and we all know prices do stretch on both sides, when liquidity and sentiments are good we see much higher participation and prices are pushed higher stretching the PE. Similarly on the way down we see panic pushing valuations much lower than the "just" value. The bottom line is that stock prices are not only value of the fundamentals but also of sentiment, liquidity and many more x factors! I always believe in my theory that you never know what is the right value, we have guidelines which give a rough idea, but that too are not dependable.
Money Managers follow a model, to buy and sell stocks, which roughly resemble something called Rotation Model, which ideally is to sell stocks that you own which have rallied and buy those which have corrected. This too has to be done in phases, so when you have decided to buy X as it has corrected and you are comfortable buying it, you buy it in 3 to 5 stages, irrespective of where the price goes as long as it is in the "range".
The current environment where stocks are being chased, and general sentiment is quite bullish; hunting value is a real tedious job for retail investors as whichever stock you look at, seems to have multiplied several times from their lows. And the fact that they have seen those lows, they are "anchored" to those prices and unwilling to buy.
Just to get rid of this psychological barrier the above "forced" technique is applied as long as the macroeconomics do not change, where they need to upgrade or degrade sectors and stocks. Lets see few of the recently degraded stocks, to see if they have corrected and consolidated enough to entice the liquidity.
RCOM, Punj LLoyd and Everest Kanto Cylinders all of them corrected between 35 to 50% from their peak in quick time due to different fundamental reasons. All of them have been moving in a small range post correction, which can be termed as consolidation. Definitely selling has been done for the time being as we can see the prices are no longer moving down. What argument can be given for prices to move higher from here... All I can think of is liquidity and the fact that they are not correcting more can force market participants to believe that they are buying at fair value and relatively closer to the bottom. Any hint of good news can force these stocks to rally hard as they are quite under-owned and the fall had been very quick, so not many people own these stocks in the steep fall region.
Buying these stocks should work for long to medium term players. A 50% recovery should be minimum target for each of them. Target for RCOM 240, Punj Lloyd 245 and EKC 180 is what it comes out to. The fact that basic assumption is rising and consolidation market, any breakdown in overall market view should be treated as sell signals.
Money Managers follow a model, to buy and sell stocks, which roughly resemble something called Rotation Model, which ideally is to sell stocks that you own which have rallied and buy those which have corrected. This too has to be done in phases, so when you have decided to buy X as it has corrected and you are comfortable buying it, you buy it in 3 to 5 stages, irrespective of where the price goes as long as it is in the "range".
The current environment where stocks are being chased, and general sentiment is quite bullish; hunting value is a real tedious job for retail investors as whichever stock you look at, seems to have multiplied several times from their lows. And the fact that they have seen those lows, they are "anchored" to those prices and unwilling to buy.
Just to get rid of this psychological barrier the above "forced" technique is applied as long as the macroeconomics do not change, where they need to upgrade or degrade sectors and stocks. Lets see few of the recently degraded stocks, to see if they have corrected and consolidated enough to entice the liquidity.
Buying these stocks should work for long to medium term players. A 50% recovery should be minimum target for each of them. Target for RCOM 240, Punj Lloyd 245 and EKC 180 is what it comes out to. The fact that basic assumption is rising and consolidation market, any breakdown in overall market view should be treated as sell signals.
06 January 2010
02 January 2010
The Benner-Fibonacci Cycle
Found an interesting theory, though I wonder how many people are aware of it and why didn't I stumbled across it earlier. Its called Benner cycle and was based on observation made by farmer Benner about economic cycle way back in 19th century and mostly based on few commodity prices. Which broadly speaking talks about at what time intervals prices make peak and troughs and how they are related to the economic cycle. You can do a google "Benner Cycle" for more information. Frost came out with a variation of Benner Cycle and tried fitting his hypothesis on Dow Jones Index. Which actually has quite stunning results if you see the image below.
The basic idea which Frost along with Prechter propose is that stock markets peak have a cycle of 8-9-10 years, that is 1902 peak is followed by 1910, 1919 and then 1929. Similarly Troughs follow a cycle of 16-18-20 years and Major Troughs also follow a cycle of 16-18-20 years. When compared with actual data we see some incredible timing and some clear cut misses. The 1995 trough prediction surely is a major flop and 1975 trough prediction a stunning hit! Similarly 2000 high and 2003 low prediction makes you tend to believe this guy and 2009 low and 2007 high not getting predicted makes you throw this mumbo-jumbo out of the window! If we were to believe it 2010 should see a high which may or may not be higher than the one in 2000 and 2011 should see a trough which can be referred to till we reach 2018! The chart of Dow from 1900 can be found here.
Well Benner and Frost tried their best to find the golden timing technique which can give us the best time to buy and sell stocks. They used the known cyclic nature of economy to get to the unknown ways which govern the cyclic nature of stock markets. The basic problem which can be pointed out is that how Americans do business and what their economy runs on have changed a lot from what Benner observed and even after Frost and Prechter modified it. Still I feel we can put some faith on these guys and the years of research and hard work they have done to arrive at this. Who knows 2007 highs would be diminished by 2010's and 2008 lows will look better than 2011's!
The basic idea which Frost along with Prechter propose is that stock markets peak have a cycle of 8-9-10 years, that is 1902 peak is followed by 1910, 1919 and then 1929. Similarly Troughs follow a cycle of 16-18-20 years and Major Troughs also follow a cycle of 16-18-20 years. When compared with actual data we see some incredible timing and some clear cut misses. The 1995 trough prediction surely is a major flop and 1975 trough prediction a stunning hit! Similarly 2000 high and 2003 low prediction makes you tend to believe this guy and 2009 low and 2007 high not getting predicted makes you throw this mumbo-jumbo out of the window! If we were to believe it 2010 should see a high which may or may not be higher than the one in 2000 and 2011 should see a trough which can be referred to till we reach 2018! The chart of Dow from 1900 can be found here.
Well Benner and Frost tried their best to find the golden timing technique which can give us the best time to buy and sell stocks. They used the known cyclic nature of economy to get to the unknown ways which govern the cyclic nature of stock markets. The basic problem which can be pointed out is that how Americans do business and what their economy runs on have changed a lot from what Benner observed and even after Frost and Prechter modified it. Still I feel we can put some faith on these guys and the years of research and hard work they have done to arrive at this. Who knows 2007 highs would be diminished by 2010's and 2008 lows will look better than 2011's!
Nifty : Extended Wave Curse?
Happy New Year to all. While 2009 ended with the expiry of December series all talk was about how great this year was and in many cases the decade, for Indian economy as well as stock markets. No doubt if we look back we see fabulous returns all the way. While Sensex boomed from lows of 7500 to 17500 this year, it has multiplied 7 times from 2003 lows! Surely a great reward for investors who had the patience to hold on or courage to buy India during the Oct 2008- Mar 2009 gloom. As for the Market Gurus who bought stocks during 2003 collapse, all I can do is salute them!
Lets try to gauge what can be expected from 2010. The chart above is a 7 year Nifty chart showing the lows of 2003 which turned out to be a major bottom! I have labelled the subsequent upmove as the 5 wave bull market structure as per Elliot Wave Theory (EWT). We can see the parabolic move which ended in Jan 2008 and then came a collapse of catastrophic in nature. Parabolic moves always end this way. Look at Crude in 2008. Another interesting feature that cannot be overlooked is that when things go parabolic it violates the basic principles of EWT, which says 3rd wave should be the longest, as it is the 5th wave becomes the largest. Research showed that 5th wave extensions are mostly found in leveraged products and instruments which become playground for speculators. A ETF in that name is a quick check to see if this happening! There is obviously value in the product concerned here but as usual it is recognized way too late by the general public, mostly at the end of 3rd wave where it catches attention due to its soaring move. Some correction mostly of time follows as there are hardly sellers for it. Desperate buyers throw in their towels to get hold of it and it starts moving again.. Our fund managers then realize they waited too long and they too join the party. Some opportunist fund starts an ETF for it to let the retail have a taste of it, the price in the meantime has soared enough to make newspaper headlines and every "paanwala" is talking about it. Then comes the collapse, with all the smart money moving out of the party in a flash leaving the retailers to see their hard earned money first immediately half and then erode day after day.
Enough of describing extended 5th waves, lets see what can be expected from the current wave B and the expected wave C. EWT says that wave B can be as large as 78% of wave A if its a "zig-zag" ABC correction and can be at the most 138% of wave A if it belongs to a "flat" ABC correction. There are hardly any instances, or to be exact none, of flat ABC correction after and extended 5th wave, in the limited cases that I went through before posting this. But same is the case with a 78% retracement. Would definitely keep looking for patterns which may resemble what Nifty is following. But as we know the current situation of our economy and government policy is vastly different from any other period in past, any chance of finding something would be feeble. But what remains constant is how people react to a given condition, how much they fear a crash and how much they get desperate to make easy money.
As Nifty it is still below 5450 which is roughly the 78% target currently and hence the ideal extended 5th wave target of wave C is still valid. Which "hopelessly" states that it can bottom where wave A bottomed (2250 Nifty) or in the wave 2 region (1200-2000 Nifty), it can also erase the entire impulsive wave (below 900 Nifty) !
One can already see the impact of extended 5th waves within the extended 5th wave from May 2006 lows to Jan 2008 highs, where 5th wave of minor degree labelled as (v) was the longest and did the trick by making the next wave bottom below the level from where it started to rise (labelled as 4).
If Nifty crosses 5500 on the way up, chances of touching the 6350 highs increase more than ever. It can also keep going beyond it, till 138% retracement condition is intact and a revisit of 2250 lows highly possible.
If you look at the MACD, TRIX and RSI oscillators I doubt hardly any chartist will vouch for a big rally from now on. Every aspect of the rise from March lows looks more of an oversold bounce than a genuine rally based on strong fundamentals of expanding economy. Be it strong liquidity injection into the system in form of stimulus or be it a knee jerk reaction from oversold levels of RSI of 25. Generally a long term bull market rally (new 5 wave structure) is preceded by long painful period of consolidation, where market can move for years in a range, needed to build energy for the upmove. Nothing of that sort has been seen recently.
So if, we are yet to see the wave C, the first question that comes to mind is what will cause it? Some sort of crisis again, some extreme economic phenomena hyperinflation or deflation, some kind of geopolitical risk or something very specific to India. Naturally only time will tell, what happens in 2010, but chances of a big UP year after a big UP year is very low historically. There are high chances that if the market do not correct significantly there can be a "meltup" and we can see another 25-30% rally in very quick time. Lets see if the market can surprise us this time.
