Technicals for the Week

Markets seem to have made a short term bottom at 5329.Lets look at what could be key levels in the coming weeks.

1. The Fall if completed from 5944 to 5329 would be one leg of a fresh unfolding down move. Retracement levels are placed at 5564, 5637 and 5709.

2. The 20 ema is at 5502 and 20 MA at 5490. Close above these levels key to close all shorts.

3. The 200 EMA at 5600 levels is first key target.

4. The Fall terminated before touching the lower Bollinger Band. Usually for a fall or rise to be completed it has to touch the upper or lower end though that is not a rule.

5. Fresh shorts on break of 5360.

6. If its a 3rd leg fall from 6339, first leg 6339-5177, second leg up 5177-5944. Third leg down from 5944 with targets of 4722.

7. The fall took around 22 days so if its retracement of the entire fall it could take about 8-12 days of rise.We have already completed 2-3 days, which means next week could be positive.

8.Gold is holding the 1500 levels and the dollar is weakening.

9. The G-Sec Rate for 10 year bond has reached 8.4 pc. Peak achieved was 9.55 % and we may be a quarter away from reaching it.

To sum up, long above 5502 if sustains and shorts below 5350. In between stay light.

200 Day Moving Average and 200 EMA: Market Behaviour

The 200 DMA is supposed to the dividing line between a Bear and a Bull Market. Let us take a look at how the markets have behaved ever since the Bull Run started in March 2009.
The Markets have traded below the 200 DMA 3 times in May 2010, Feb 2011 and now in May 2011. Prior to this, the markets bounced off the 200 DMA in Feb 2010.

1. Each time, the market goes below 200 DMA it seems to spend more time below it. First time in May 2010, it spent 6 days below it then criss-crossed for a couple of times for a day of 2. The low achieved was 4.2 pc below the 200 DMA.

2. The next time in Feb 2011, we spent about 40 days below the 200 DMA and the low was 8 pc below the 200 DMA.

3. This time round we have already spent 16 days below the 200 DMA and the low has been about 6.15 pc below the 200 DMA.

Now lets look at the 200 EMA.

1. In May 2010, we spent 1 day below the 200 EMA and the low recorded was 2.2 pc below the 200 EMA. In Feb 2011, we spent 46 days below 200 EMA and the low was 8 pc below the 200 EMA. This time in May 2011, we have spent 14 days below the 200 EMA and the low recorded has been about 4 pc below the 200 EMA.

2. Also, in Feb 2011, the index tried breached the 200 EMA failing 2 times and succeeding in the third attempt. We have already made 1 more attempt at 5605 and its likely we could have another go at the 200 EMA at 5615 before falling.

As the time has been going by, the index has been spending more and more time below the 200 DMA and 300 EMA indicating that the rally is weakening. This also, means the upside is capped at 5600 and at the downside we have the range 4800 to 5150 to be tested.

Outlook for Indian Equities - A letter to Taran Marwah

Dear Mr Taran Marwah,

Good Evening.

I am an avid follower of the capital markets and keep myself abreast of all current developments either through the print media or the electronic media (primarily through NDTV PROFIT & CNBC-TV18). I am also
interested in reading articles on personal finance and investments in varied asset classes.

I have often read your e-mails with great interest whenever you post them online and have found them to be quite relevant and meaningful.

Coming back to equities, I have recently stumbled upon reviews by eminent analysts from HDFC Bank & Morgan Stanley who have predicted that the Sensex would touch 24,000 & 30,000 levels respectively within the next 12-18 months. I frankly fail to understand the rationale behind such optimism. Is this just a figment of their
imagination or are there any fundamentals/technicals to justify such high expectations?

My view is that the next few months would be a testing time for Indian equities and that expectations would have to be severely scaled down, keeping in mind the recent muted earnings of top organisations, continuous rate hikes by the RBI with more
rate hikes expected, inflation inching closer to 2 digits, squeeze on the margins of most companies across sectors, etc. Also, I recently came across a news report that within emerging economies, India was beginning to show signs of losing favour with global investors, who were now exploring better returns,particularly in Brazil, China, Mexico, etc.

Would appreciate if you could put forward your perspective on the outlook for Indian equities for FY 11-12 and what levels do you foreacast for the Sensex & Nifty by March'12.

Regards,
Sanil Sonalkar

Crude Oil Presentation

Taran and I had done a study on the historical movement of crude oil prices and the path they are expected to take.
Please refer the path below to access the presentation.
https://groups.google.com/group/nav-files/browse_thread/thread/ddb3a7230421772e?hl=en-GB

Options for Hedging

Options are much misunderstood and much maligned. They are best used for hedging, and not as a gambling mechanism.
I have written a guest post on the same for Subhankar.
Continue Reading at:
http://investmentsfordummieslikeme.blogspot.com/2011/05/how-to-use-options-as-hedge-guest-post.html

Technicals for the Next Week

It was a sideways kind of week with the Nifty registering a fall of 0.1 pc. The kind of movement suggests that it is a pause before the continuation of the fall. Let us look at a few technical parameters.

1. 5476 is a key support level for this month. The Markets hit 5472 and then bounced back. Keep a close on 5472. If it sustains below this level, one ca go short.

2. 5624 is the 200 EMA and 5754 is the 200 DMA. Longs only above 5624.

3. The biggest sign that this is a new impulsive downtrend for me is that it took 9 sessions to fall from 5912 to 5444. Its taken 6 sessions to reach a high of 5605 and we have not even retraced 38 pc of the fall. This makes it clear to me that this is a pause before further fall.

4. The Bollinger Bands are opening up indicating a further fall. The support currently comes at 5393.

5. The various channels are marked on the chart. 5451 is a key support breaking which the multi-month channel gets broken. The height of the channel is about 500 points which gives us a target of 4900-4950 points.

Summary:
Longs on close above 5624. Shorts if sustains below 5472. In between go long at around 5510 with stop loss at 5472 and short at around 5600 with stop loss at 5624.
The range of about 130 points should break soon giving targets of 5750 or 5350 both key levels. One is the previous bottom and the other is the 200 MA. The Range for this expiry should 5350-5750.

Important cues post monetary policy & assembly election results - Detailed analysis Guest Post Sanil Sonalkar

A Guest post from Sanil Sonalkar

The RBI's monetary policy announcement on 3rd May, 2011 seems to have thrown a spanner in the works and upset the calculations of most analysts who had reasons to believe that the Sensex had a smart chance of crossing the 20,000 barrier. We are now trading at considerably lower levels & some blue-chip counters are dangerously close to their 52-week lows. Yesterday's relief rally can be partially attributed to the positive election results and partially to short-covering in many of the counters. In the aftermath of the policy announcement & the assembly election results, we need to take a holistic view of the political & economic situation and its likely impact on our markets. I have managed to identify the following important cues for the coming days :-

(1) Interest rate sensitives are bound to be under some pressure for the time being at least. Under such circumstances, traditionally, investors would look at parking funds in safer havens such as FMCG, Pharma & IT which are not directly impacted. FMCG, in particular, would be a reasonably safe bet, but purely for investors who are looking at just capital protection and not-so-great returns. Banks, which have borne the brunt of the rate hikes, are now looking relatively cheaper. A contrarian buy would be to accumulate good private banking stocks at the current lower levels in a phased manner. My sense is that some more rate hikes are imminent in the coming months but once this peaks out, expect a significant rally in these banking stocks.

(2)There is good news for depositors of bank deposits on two counts :- firstly, you would get 0.5% higher on your savings bank account, which would induce investors to park some additional surplus funds here ; secondly, some banks have now started giving higher returns on short-term FD's (upto 1 year) - HDFC Bank being a prime example. Investors, who are wary of the extreme volatility that is currently present in equity markets would do well by capitalising on the higher interest rates by adding to their bank deposits portfolio. (this is
again for people who are just looking at capital protection and are willing to sacrifice on higher post-tax returns).

(3) The yellow metal - gold seems to have lost some of its lustre over the past few days. With Akshaya Tritiya out of the way, movement here is likely to remain subdued, and even some minor corrections cannot be ruled out. A prudent move would be to go through the GOLD ETF route and make systematic investments in a phased manner and never in a lumpsum.

(4) Firms primarily based out of West Bengal are likely to benefit on account of the change in the regime. People are now expecting some growth and development in this region and possibly fresh investments might also get an impetus. ITC is a classic example of an organisation which could immensely benefit from the political developments. Existing investors could consider adding to their portfolio while new investors could consider some exposure towards this stock.

Important Week Coming up

It was a big week gone by. The RBI hiked rates by 50 basis points and the markets tanked by 3.4 pc. Gold and Silver along with other commodities fell. The next week is of even more significance. The Election Results will be out next Friday. That would determine the path Markets take.

1. The RBI hiked rates by 50 basis points. This was more than expected and the markets tanked.Expect Banks and Autos to be under strain. The Auto sales dipped for April ad expect this trend to continue.

2. The Petrol prices should be hiked this week. Expect a Rs 3-4 hike in both petrol and diesel prices.

3. The Elections will be out on Friday. West Bengal, Kerala and Assam to the Congress. Tamil Nadu to Jayalalitha. If the Congress fail to win WB or Kerala expect further tanking.

4. Lets take the entire fall from 6339 as a fall out of which we are commencing the Third Wave down.
Wave 1 was 6339 to 5177 - a fall of 1162 points
Wave 2 5177 - 5944 - a rise of 767 points or a 66 pc retracement.
Wave 3 should be a fall of 1162 or 1882 points.

This gives us targets of 4782 or 4062. 4786 was an important bottom made in May last year.

5. Take a look at the weekly charts.A close below 5500 should invite further shorts.

6.The 200 EMA and 200 DMA are upward resistances. They come at 5628 and 5750. The Retracement levels of this fall comes to 5638, 5694 and 5754 which should be resistance marks.

7. Fresh shorts below 5476 or if Nifty fails to move above 5593-5600 levels.

Chart for the Day:Sigificance of 200 DMA and 200 EMA

Have a look at the charts. A re-test should be on the cards. 5632 and then quite possibly 5750. We wait and we watch.

May is key Month for the Markets

May has historically seen wild swings in the year when there have been key Election Results. Lets have a look at the data for the past 10 years. Also, we have the RBI policy to contend with on Tuesday.

1. There have been Lok Sabha Elections in 2004 and 2009. Assembly elections in 2006. The results have been declared in May and there have been wild swings. Dips of 28 pc in 2004 and 18 pc in 2006 ad 30 pc rise in May 2009.

2. We have the election results coming in on May 13th 2011. Tamil Nadu looks a lost cause for DMK and Congress, Assam and West Bengal in Congress kitty and Kerala is undecided. If the Congress look more than Tamil Nadu, then the ruling party looks to be shaken. They have frittered away the legacy of the win in 2009.

3. The April close of 5750 becomes a key level now. Long above it and short below it could be 1 formula one can use.

4. The 200 DMA at 5748 and 200 EMA at 5632 are key levels.No longs below these key levels.

5. Even in the years, the markets have tanked big time in 2004 and 2006, the highs have been substantially above the closing price of April.

What do we infer from all this? The falls have all been electoral news driven. Hence its better to be short only below the April closing and hedged shorts on the election result day.

Gold has been rising and has given a breakout from the key 1500 dollars and ounce levels.