The Liquidity Flow Decides the Short Term Direction

The Markets just collapsed on the first 2 days of trading and then smartly rebounded. The Markets are a play on the Dollar Index and the liquidity oozing in or out.
Lets look at the fundamentals:

1. Fundamentals do not change overnight. They are a series of factors which takes weeks, months and years to play out. On the Indian markets nothing has changed much. The Monsoons are the next trigger. A good monsoon is somewhat factored in, but a delay would trigger a sell off.

2. Europe looks to be descending the black hole. Spain has unemployment of 20 pc and the ratings downgrade late Friday set off a slide. The number of countries in trouble are expanding.

3. The things looking good right now for me is the Oil and Gas sector. Oil prices will move higher with the US problems with Offshore drilling and RIL is my top pick to capitalize on this sector.

4. The US treasuries yield came down for the 30 year bond. This showed its a flight to safety and quality. People are willing for lower returns in order to safeguard their capital.

5. The Dollar Index spiked up and the came down a bit. The FIIs were sellers on the first two days of the rally and then finally turned buyers on Friday. This flow is crucial in seeing if we continue rallying.


6. 2010 began with Nifty at 5200, now we are at 5078. It about 5 months we have gone nowhere. Just moved in a range of 4700-5400. The breaking of this range would suggest 6100 or 4000.

Technically:
1. The jury is out whether the correction is over and we proceed on another leg up. Have a look at the daily channel down. We are consistently hitting both the bottom and the top of the channel. The bottom is around 4720 levels now. If we do not breach 5105 we may head down.




2. 5105 is a key figure because it was the previous top about 2 weeks back. Shorts can keep that as a stop loss.

3. We are below all the key averages of 50 ema and 100 emas which come at 5107 and 5080. Once these are taken out we can explore the bullish options.

4. The Daily indicators like Parabolic SAR, NMA have either given a buy or are on the verge of giving a buy signal. This is what makes the next 2 days very crucial in deciding the outlook for June for the markets.

5. One very interesting feature is that the Nifty futures are at a discount of almost 25 points to the spot price. This is rarely seen. Dividends of shares will take out about 7 points discount. In such markets its the option writers who make money.
An example is say any At the Money Call Option, example 5000 strike call, when market was at 5000 June series was trading at 170 rupees on Tuesday and same is ow about 134. 40 points just shaved off. The above example is just an illustration to show how the premium is decreasing.

6. Gann indicates strong supports around 4750 on a weekly closing basis.


A breakout above 5105 may leads to further upsides.

Long Term Gann Supports at 4750

Maybe a small bounce from 4750- 4770 levels.

Markets Next Week: FIIs press the Sell button

It was another week of losses for the Indian Stocks with the Nifty losing -3.2% for the Week. It was a Week characterized with Heavy FII withdrawals.

1.The FII withdrew about 5245 crores for the week and also were Sellers for the Entire Week. The DIIs bought about 2302 crores. For the year, the FII tally is now in the negative with a net sell figure of about 1600 crores. On Dec 31st 2009, the Market was at 5200 and today at 4931, a loss of 270 points.

2.There are few reasons for this FII sellout. First is the Dollar Index shooting up, leading to the hot money pullout. Typically these hedge funds borrow in dollars with an Interest Rate of say about 1 pc and leverage it about 10 times. Now if 1 Dollar = 44 rupees moves to 1 Dollar = 47 rupees, the markets have to rise about 10 pc for them just to recoup their capital.
3.The Strength in the Dollar Index and the fall in the markets have hastened this pullout. Another fact is the is the ULIP mess which has led to lower inflows into domestic funds.
4.The positives for the Market are the 3G Auction bonanza and also the lower crude prices. If global markets go down, then Indian markets will also follow. But these savings form the base for the next rally. When the markets recover worldwide, the Indian stocks would go up faster.
5.The Markets breached 200 DMA now at 4993 and which would act as a resistance. The markets rarely break a resistance and support at the first attempt and there would more re-tests of the 200 EMA now at 4898 levels.
6.The Weekly Bollinger Bands are rarely broken on either side and when violated, the markets simply collapse. The support comes in at 4776 for the next week.

7.The markets took support exactly at the downward channel. For the next week, support comes in at 4780-4820 band and resistance at 5050-5090. I expect a relief rally to these levels


8.The market breached the support line from July and it now becomes a resistance around 5020

9.The Weekly RSI is on a downward spiral. The markets could fall till it tests the support line.


10.This is the Expiry week and expect sharp moves the either side.The Max OI is around 5000 strike. Expiry should be between 4950-5050.
11. It took about 38 sessions for the markets to rise from 4675 to 5400 and the fall has consumed about 32 sessions. One of the theories is faster retracement theory to see if the direction has reversed. By this logic, the markets should breach 4675 by next Monday, if this is the beginning of a deeper correction.
Its time to start making the shopping lists ready.

Cover Most of your shorts today

In almost a week, the market has fallen 300 points and more to fall today. A technical bounce is due.
Please cover most of your shorts today.

Markets Next Week : Watch the Dollar Index

This week, Monday we had big up day and rest of the week, it was just sideways movement followed by a breakdown on Friday. We are heavily dependent on FII flows and I did a study for the Month of May on the Dollar Index and FII funds flow pullout.

1. The Results season is out of the way and no major surprises. Honestly, I feel the Results usually get factored in much earlier. The next triggers could be the onset of Monsoon setting in. This not too big a trigger unless the Monsoons fail.
2. The EU mess continues. The bailout does not seem that great a thing as was seen earlier. The ghosts of EU will keep haunting us.
3. The FII outflow continues. It is the hot money outflow which will be a drag on the markets. I did a study on the dollar index. It went from 82 to almost 85.6. The FII pullout of funds increased directly. So, just watch the Dollar Index. Euro weakened to 1.24 levels in spite of the bailout. Eventual target is 1 Euro = 1 Dollar. That will take the Dollar Index to 91-92 levels.




4. If we see the Downward Channel, we have support around 4926 and resistance at 5160 levels


5. Weekly channel supports are at 5008 and 4800.

6. If we see the falls from August onwards we see an interesting divergence this time. Usually, when the market rebounds and goes past 30 and 50 emas it just goes up again. This time, it tested these 2 averages and fell again indicating a larger fall is around the corner.


7. I had show the break of 3 trend lines from the lows of March 09. 1 thing I forgot to highlight was that once breached the trend line it never goes past it again. We came near to violating the trend line but fell off.

8. The BB supports come in at 5016 on a daily scale and 4726 on Weekly scales.

9. Its Open Interest time again, huge Put build at 5000 strike around 85 lakh and at 5200, 5300 calls also. This indicates 5000 will not give way that easily and 5200, 5300 will not breach very easily this expiry.

10. The 200 EMA comes in 4895 ad 200 DMA comes in at 4982. They have not been tested so far.
So in a nutshell, I expect Markets to take support around 5000 levels, a small bounce up of 100-125 points before continuing the fall.

How the European Woes Affect All of Us

Over the last few weeks, Greece and the so - called PIIGs countries of Europe have been under the spotlight. Let us examine what is the European Union, why the debts of certain member countries are a threat to all and the way going forward.
The roots of the European Union can be traced to the period after the Second World War and the rebuilding of Europe. For those who are interested in reading further, wiki has interesting nuggets:
http://en.wikipedia.org/wiki/European_Union
The EU has a membership of about 27 nations. It is somewhat like Federal Structure of India where weak states are subsidized by the stronger states. This is the reason why in India, the so-called BiMaRu belt ( Bihar, Madhya Pradesh and UP) even if they were not doing well earlier, the other states made up for it.
Now, Greece, Spain, Italy, Ireland and Portugal have ran up huge debts mainly due to lack of earnings and huge spending.
The confidence in Greece's ability to pay up led a run on their bonds (debt). No one was willing to lend to Greece as they thought in case of a default, the institutions issuing the debt would loose their money.
If there was no Euro, and the Greece Drachma, the problem would have been limited to Greece, there would have been sympathetic noises made and the world would have moved on. Greece is part of the EU and has the currency Euro.EU cannot allow its member nation to fail in debt obligations, because that would mean the end of the Euro and the EU. No one would trust the Euro anymore.
The problem further stems from the fact, that the stronger countries like Germany were not too willing to bail out Greece. The reason? Taxpayers of Germany feel why should the Greeks party and we pay the bill for the party.
The same situation prevails in the other PIIGs nation. The following image got from the web, shows the magnitude of the debt.
The problem with the EU and the Euro is that it is an artificial nation and currency created without clear cut mechanisms, to cut fiscal deficits.
Now, how would this EU crisis affect other nations:
1. EU has 21% of the World's GDP. It is the largest trading partner to the countries like China and India.
2. A weak Euro hurts exports from India to EU.The margins get hit. If there is less demand in EU, the exports get hit anyway. Prime example our Automakers namely Maruti and Hyundai exports big volumes of cars to EU.
3. The Dollar Index has already moved up to 86 from 74. A strong Dollar means the end of the Dollar Carry Trade and the hot money moves out from the Emerging Economies and moves back to the US.

The next few months and how the EU crisis pans out will show us where our markets will go.
To think of it, it was only in last year where the talk was that that the Euro would replace the USD as the world's premier currency.

Markets Next Week

As suggested in the last week's post, the Greek Tragedy did pose a shadow over the world. The Dow did a mid-week drama intra-day dropping 1000 points, the Ambanis had their day out in the court. It was an Action packed hot summer week. There are a few very significant cues happening which one should take note of.

1. The FIIs sold and sold huge. 4252 crores sold in May itself and last 3 days around 3600 crores. The rupee tanked from 44.20 odd levels to mid 45 levels. The FII money is what has led this rally. This year they have net bought around 4500 crores. The Dollar Index has moved onto 84 levels. A strong dollar means the dollar carry trade unraveling. The DIIs have bought around 12000 crores this year.

2. Gold has jumped to 1210 dollars per ounce. Gold ETF closed around Rs 1740. We have been recommending to buy Gold for past 3-4 months from around Rs 1600 odd levels. More the mess in Europe, more Gold prices will increase. Gold prices have been moving up in spite of a strong dollar.

3. RIL - RNRL judgment has gone in favor of RIL. RIL is a buy on all dips. Oil and gas is where the money is. Whenever market falls RIL should be accumulated.

4. The European mess is just increasing. Germany is being portrayed as the saviour of europe. If we think a bit, I would say Germany is more to be blamed for the mess Europe finds itself in. Why? China is being pilloried for a weak Reminbi which makes their exports cheap. Germany is having the same benefit. Weak Euro cushions Germany's exports at the cost of other EU nations. Germany has a trade surplus with all its partners. The Euro itself is a flawed currency and needs reform. Thanks to Germany, the other EU nations cannot export more and have to cut spending. The EU is signing up for a recession of several years.

5. EU in recession is bad news for the US and the globe. If they cannot export to EU, then a large market is hut out for them.

6. The Telecom Auction is going rake in the government about 50000 crores from 3G and around 15000 crores from the WiFi Auction. This would take the earings to almost double of 35000 crores projected. The Fiscal Deficit would be taken care of. The 2G Auction cost the people of India almost 30000 crores thanks to faulty mechanisms. No one seems quite concerned about.

7. The Dow dropped around 1000 points on Thursday intra day and then closed down 350 points. Again on Friday, dropped 150 points. So in reality it has lost 500 points on a closing basis in last 2 days. This means there is something which we do not know. There is no glitch but someone is indeed selling out. Someone big and someone who knows something which we do not know.

Technically:

1. We seem to be taking support at the trend lines from July lows right now.A break of that and next strong supports are at 4800 levels.



2. The 200 DMA at 4961 and 200 EMA at 4881 are supports.

3. Look at the 3 times, the Nifty as broke trend lie support from March 09 lows. Each time a break has yielded around 500 points. This time if this plays true we have a range of 4700-4800 as supports.



4. The Weekly NMA has given a sell. Typically a sell signals yields around 200 points more again taking us to 4800 odd levels.



5. Look at the Weekly Bollinger band levels. From MArch 09, each corrections are taking us closer to the lower band.This very beautifully illustrates how the Rally is weakening. Supports at bottom are at around 4700 levels.



6. 4951 is the 61.8 % retracement level from 4675-5400.

In a nutshell, 4961, 4881, 4800, 4700 are supports. We can hope for some bounces above 5072, 5109.

Keep adding RIL and Gold at every dip.

RIL-RNRL Judgement

Tomorrow is judgment day at 10:30 am. SO which way will it swing?

1.RIL wins
Why? Look at price movement in past 2-3 days. RNRL tanking and RIL steady and marginally positive

2. RNRL wins
Why? They won in High Court and SC might go with the arguments which swayed HC. Its always difficult to overturn a verdict.

3. Limbo
No clear judgment. This appears remote but we never know.

So technical say RIL wins and fundamentals say RNRL. Wonder which one wins?

Three Downward Triggers to Watch For

As expected, the expiry happened around 5250. There are 3 major triggers to be watched over for the month of May. The old adage goes "Sell in May" and go for a vacation. We did not have the customary Jan-March correction so we are due for one in May.

The 3 triggers are:
1. European Sovereign Debt problems
2. 2G Auction scandal.
3. US Goldman issues.

Lets take them 1 at a time.

1. European Sovereign Debt issues.
It started with Greece and is spreading to Portugal, Spain and Italy. Spain has an unemployment rate of 20%. There have been ratings downgrades for Portugal as well as Spain. Things could spiral out of control pretty fast. Its not the first cockroach that causes the panic. Bear Stearn came out in March last year. It was Lehman in September that sparked the panic. Greece has been hogging headlines for 3-4 months now. The next country to go down will cause panic.

2. 2G scam
This makes Bofors look like a picnic. Bofors was 64 crores. 2G should be 40000 crores. The scam is simple. Issue spectrum in 2008 at rates which are of 2001 era and issue spectrum on first cum first served basis. The audacity is mind blowing and further the leaks which show that PM advice was ignored. The Telecom Minister should go and along with him the Prime Minister. Divestment total proceeds are marked as 35000 crores this year.
Its up to the Opposition to make the government pay.

3. US Goldman issues.
Goldman is the big daddy of investments in the US. Talk of criminal investigation and all makes people nervous. The way the markets tanked on past 2 Fridays gives a fair idea of what is to come.
This may be the weakest of 3 downward triggers, but cannot be ignored.

4. RIL-RNRL dispute verdict is expected to be out next week. I somehow feel SC will uphold the High Court verdict in favor of RNRL.

All in all, the reasons for the market to go up seem to be diminishing. Results are out of the way.Good monsoons can be one big trigger.
Gold hit all time highs at about 1182$. In rupee terms available at Rs 1670 per gram. This may be one last chance to get in at these rates.

Technicals.
1. 5200 is a very strong support. Multiple reasons to support this. Max OI is at 5200 put. It is a monthly pivot level. the 50 EMA comes around this level. The 5 week low ema which is often the last support is at 5189, as also the Bollinger Band bottom at 5189. I expect 1 more bounce from 5180-5200 levels to maybe about 5250-5270 levels before breaching those levels.

2. We are moving in a downward channel, with support around 5180.Breach of these levels should take us to 5050.




3. The NMA indicator has given a sell. It gave a sell, then a buy and now again a sell. Such see-saw happens just around a major trend change.