Saturday, April 24, 2010

Markets Next Week: Political Uncertainty

It was another week at the markets where news dominated the events. It was a crucial results week also with heavyweights like Reliance, Wipro and the banks came out with results.

1. Reliance came in with Results which were below street estimates. The profits for Q4 were expected at 5200 crores on an average consensus and between 4700-5700 crores. It came in at 4700 crores. More worrying was the fall in operating margins from 21 % to 16 % and the fall in refining margins. Wipro too came in with just about average results. HDFC Bank and ICICI Bank will come out with results today.
So far, the Results season there have been no major surprises or major disappointments.

2. The Goldman issue died down within 2 days. Greece is again hogging the headlines. The looks of it is that the cockroaches will start coming out again. The fiscal deficits of Ireland and Greece are in the range 12-14 %.

3. What the weakness in Europe means that the USD will strengthen and the Euro will remain under pressure. US markets will continue to outperform the other markets in the short term.

4. The Dollar Index has been going up from 74 to 82 in the past 6 months, but the rupee has strengthened to 44.50 from 48-49 levels. This is because of heavy FII inflows. What can reverse this inflow?

5. Political uncertainty has increased. The Opposition is presenting an United Front and the Government is veering from 1 disaster to another. From Naxal attacks to IPL Gate to now phone tapping. The Finance Bill is yet to be passed. The government is forced to make compromises with folks like Mayawati to ensure its passage. It has a strength of 271 members in a house of 540 members. The mandate of last year seems to be in the danger of being frittered away.

6. Forecast of a good monsoon is a positive. The weather department has not forecast even 1 drought in last 150 years. Till the rains come in, we can keep our fingers crossed.


1. The markets are consolidating in this range. The expiry is this week and lets looks at the Open Interest. Max OI is at 5300 strike price with about 68 lakhs puts and 64 lakhs calls written. Normally expiry occurs +- 50 points of max OI concentration. This gives an expiry target of 5250 - 5350.

2. Interestingly, trend lines support above theory. If you see the convergence of trend lines, they form a triangle at 5305. Upward breakout at 5325 and downward at 5265. This should get resolved by Tuesday.

3. Weekly charts suggest resistances at 5345 and 5370.

4. Break of downward channel comes in at around 5328 levels.

5. If we see the charts, a cluster of resistances comes in from 5325-5370 levels. 80 pc retracement comes in at 5352.

6. 5228 is a key sipport level as market made a bottom aorund these levels twice this week.

On the whole, things have just stagnated and for the markets to go up, the negative newsflow has to stop. I do not see the markets going up unless the controversies stop.

The current week should resolve this dilemma one way or the other. The expiry week can also increase the volatility. 5258 - 5332 is the range. Break can give us 5400 or 5200.

Saturday, April 17, 2010

Action Packed Next Week in Store

We have a potentially very eventful next week coming up. The Goldman Sachs scandal on Friday after our markets closed and the RBI Credit Policy on Tuesday set things up for big moves. Lets evaluate in detail all the fundamental and technical aspects so we are well geared to meet the markets.

1. Goldman Sachs (GS) have been accused of Fraud by the SEC. This is a very serious allegation and GS will not take it lying down. The clout of GS can be seen by the fact that the previous Treasury Secretary of the US (their equivalent of our Fiance Minister) was the Head of GS.

2. 2 things can happen. It is a storm in a teacup like Dubai, due to which the markets tank for a day or 2 and recover. If it is a prolonged affair, then this might potentially trigger a bigger fall. The timing of the announcement is also suspicious. Friday, after which the markets are closed for 2 days. This might be an effort from the Obama camp to project himself as the White Knight in Shining Armour who takes on the Big Dragon from Wall Street.

3. The RBI Credit policy on Tuesday. It is expected that a Repo and Reverse Repo hike of 50 basis points. Anything more will trigger a slide like a CRR hike of 25 basis points. This will impact the liquidity immediately.

4. The past week, the market has been ignoring good news. Infy good numbers, good IIP data, inflation just below 10 pc and the markets still went down. When markets ignore good news, then one has to be careful.

5. The Results season will be in full swing. Any negative surprises will not be digested as good results are already factored in.


1. The trend line giving support from the Feb low of 4675 is broken. This may been the current up-move is over.

2. The Nifty has been moving in a downward channel for the past few days. Support comes around 5250 break of which opens a target of 5150.

3. 50 EMA comes at 5167 which should provide some support. The 5 week low EMA which always provides support also comes in at 5195.

4. Looking at Retracement levels, supports come in at 5229, 5123, 5038, 4952.

5.As per Elliot, the 5th wave might have been over at 5400. Length of 725 points. (Refer last post).

6. The Entire bull run is only in danger below 4800 where the 200 day EMA is and also the entire upward channel from November onwards ends.

7. Bollinger Band support comes in at 5190.

I would still continue to add Gold and wait for next 2 days to get over to decide next course of action. All shorts should exit above 5274.
5150-5190 is a support zone for the markets.
If any stock is to be added then it has to be Reliance. The reasons are high crude prices and in case of a fall, this stock will fall the least.

Friday, April 16, 2010

Moving in a Downward Channel

Have a look at the chart, we are moving in a downward channel.

Upward resistance at 5363, downward support at 5265 approx. Break of channel would give approx another 100 points.

5180-5200 multiple supports, not a bad idea to book profits once.

Saturday, April 10, 2010

All Eyes on Infy Results

1 more week of gains and Nifty closed at 5362 for the week. The Result season is upon us and Infy will kick off proceedings on 13th April with 14th April being a holiday. What to expect from the Results?

1. The rupee has strengthened to 19 month high of 44.29. This will impact the IT companies earnings.

2. The Steel makers, automakers, cement makers should post good results.

3. Oil prices are at 86 dollars already. A further rise would start affecting the economy. The rupee has gained 10 pc in last 2 months or so. This should cushion the high oil prices. If the prices move to three digits then we start having a problem.

4.Bond yields are hovering around the 8 pc mark and high inflation makes another round of rate hikes inevitable in the credit policy on April 20th.

5. Gold has given a breakout in dollar terms. It is just 5 % below its peak price of 1225$ per ounce. Thanks to a strong rupee, it is 9.5% below its peak price. Gold-Oil has a ratio usually of 15 barrels to 1 ounce of Gold. Right now, the ratio is 13.5. If oil moves to 100 dollars a barrel, the fair price of Gold would be 1500$ per ounce.

6. As the days goes by the risk reward continues to become more unfavorable for owning equities. Markets do not go up forever. We had this rally for 9 weeks and rallies usually last 10-12 weeks in this post March'09 rally.

7. I had given an Elliot wave post here:

Slighly modifying it:

If we take rally after the budget from 3918, we can see 4 clear waves:

a. Wave 1 - 3918 to 5181 (1263 points)

b. Wave 2 - 5181 to 4539 (642 points) approx 50% correction

c. Wave 3 - 4539 - 5310 (771 points) Wave 3 is 61% of wave 1.

d. Wave 4 - 5310 - 4675 (635 points) approx 82% correction

e. Wave 5 will unfold 4675 - ???
This has to be less than 770 points as 3rd wave cannot be shortest, the target comes to 5445 max.

I would simply stick to adding more Gold right now and keep a trailing stop loss.

Thursday, April 8, 2010

Short Term Reversal?

The Markets corrected today to close at 5304. This may be a short term reversal as the markets made a lower low and lower high after a long time and also closed below critical levels.

Supports are at 5245-5260

Resistances at 5328-5370

I am following an automated system of generating calls which is still at experimental stage. I am updating the signals at the top left hand corner in case anyone is interested in reading them.

I have been testing for 2 weeks and find that generally the signal give 50-100 points minimum.

US has also corrected yesterday. Time to be careful in the near term.

Sunday, April 4, 2010

Nifty P/E and Dividend Yield

This week lets look at 2 interesting ratios Price to Earning Ratio and the Dividend Yield of the Nifty. I have plotted the graphs from 1999-2010 taken from the NSE site.

1. Price - Earning Ratio.
This is nothing but the Market Price divided by the Earnings per Share or the Profits made by the company. This helps us identify how expensive the market is.
In the bubble peaks made by the market in 2000 and 2008, it had touched almost 28. In the bottoms made in Jan 04 and Mar 09 it was near 11 and Sept 01 around 12. Whenever the market has tumbled from P/E of 28 or rallied from 10-12 P/E it was a major top or bottom.

The market is currently around a P/E of 22.05. In Feb 01 when market tumbled from a P/E of around current levels it came to a P/E of around 13 again. On subsequent occasions it stopped its fall in a range from 12 to 15.
Now the EPS is Rs 234, after another 2 sets of quarterly results by July, assuming a gain of 6 pc, the eps should around Rs 250.
This gives a Nifty range between 3000 and 3750. This would coincide a retracement of 50 to 76 % of the rise. The figures would look speculative right now but the graph gives a perspective of P/E range.

2. Dividend Yield
Dividend yield is nothing but if we take dividend as a percentage of market price.High dividend yield means the stock price is low and vice-versa. This is inversely proportional to price of Nifty. When nifty is at highs, dividend yield is at lows and vice versa.

In 2000, the yield bottomed at 0.62, in 2008 at 0.88 and currently we are 0.93. Remember in 2000, we were in the dot com boom, hence IT stocks which give low dividend compared to price were at the top. For a dividend yield of 0.88, market would trade at around 5550 or 18500. We are not very far from that.
The yield tops out at 1.7 to 2. The dividend earning now is at 4919.Assuming a earning of Rs 5200 by the time we bottom out, Nifty would come to a range of around 3100

Both the above studies, simply indicate we may be near the top and give a range of the fall to follow.Of course, we could simply discard the 8 year cycle go on to make another peak at Nifty P/E of 28 translating to Nifty 7000 and then crash big time.

Lots to ponder about. Its your money, make informed decisions.