Corrective Bounce Due

The Markets fell about 4 pc to close at 4710 for the week. This was on the back of a 5 pc fall last week. The Markets are deeply oversold in the short term and are due for a bounce.

1. The markets have been falling hitting 5400. This is the 5th wave of the C wave which started from 5944
C1 ended at 5196
C2 ended at 5740
C3 ended at 4720
C4 ended at 5400

C5-1 ended at 4640 or should end soon. If C5-1 ended at 4640, C5-2 can go uptil 4930, 5020 or 5109.

2. Historically, the area from 4539 to 4700 has a cluster of supports and will not breakdown so very easily. A bounce of 400-500 points is very much on the cards.

3. The downward sloping channel shows supports at 4430 and resistance at 5320.

4. The difference between 5 day moving averages and the 20 day moving average has moved near historic support levels. This implies a bounce is due.

5. Historically, the month of December has always been a positive month with gains above 5 pc. Hence, the next week may be the last week of the fall at least in the short term.

To summarize, buy at supports 4640 and play for a bounce in the month of December. It is also time to start building a portfolio of blue chips and for those interested, we have Lakshmi's Cherry Picks.

Technicals for the Week

The markets lost another 2 pc during the week to close at 4748. The picture is looking gloomy all round. What does the market bring for us the next week?

1. Anna Hazare fast is over and Ben Bernanke Jackson Hole meeting did not bring any nasty surprises. Expect some bounce next week.

2. The Elliot wave analysis states that we are in last down move of the 3rd wave down.
C wave so far.

Wave 1 - 5944 - 5196 = 748 points
Wave 2 - 5196 - 5741 = 545 points
Wave 3 - 5741 - 4796 = 945 points and ongoing
Wave 3 can be sub - divided into 5 waves
Wave 1 from 5744 - 5454 = 190 points
Wave 2 = 5454 - 5552 = 98 points
Wave 3 = 5552 - 4946 = 606 points
Wave 4 = 4946 - 5198 = 252 points
Wave 5 5198 - 4720 = 478 points and going on

Wave 3 has traversed a distance of 1024 points.If it extends to 138.2 pc of wave 1, target would be 4707.
If it extends to 161.8 pc then the target would be 4530 which is also near to the November 2009 bottom of 4538.

3. A bounce from these levels would last for 3-4 weeks and can go up to 5110, 5230 and 5350. Only a close above 5550 would signal a fresh bull run.

4. All bounces should be used to go short, Longs only above 4900 for short term trading.

5. The Weekly RSI is at a critical support area over the last 20 years. So, a bounce is due.

6. Trend line shows above 4867, the downward trend of this fall gets broken.

7. The 5 week low ema comes at 4959, a close above this shows end to the down move.

8. RBI may hike rates just 1 last time on September 16th. The next week is a truncated one and expect muted trading.

9. The Channel resistances come at 4881, 5038 and 5296.

Now, is the time to start preparing a shopping list and beginning to buy.

Markets Next Week: A bounce due

The Markets continued their downward journey last week. They fell by around by 4.5 % to close at 4845. Gold hit new all-time highs. So what next?

1. Gold has broken all previous all-time highs and is now trading at 1850 dollars and ounce or close to 28000 rupees levels. I would wait for a dip before making a fresh entry. I foresee a short term top close by. Make o mistake, in the next 1 year gold will go much higher but in the short term we may see a buying climax.

2. The Nifty is in the 3rd wave down which will culminate some time next week.

C wave so far.

Wave 1 - 5944 - 5196 = 748 points
Wave 2 - 5196 - 5741 = 545 points
Wave 3 - 5741 - 4796 = 945 points and ongoing
Wave 3 can be sub - divided into 5 waves
Wave 1 from 5744 - 5454 = 190 points
Wave 2 = 5454 - 5552 = 98 points
Wave 3 = 5552 - 4946 = 606 points
Wave 4 = 4946 - 5198 = 252 points
Wave 5 5198 - 4796 = 402 points and going on

After this, we will have the entire retrace of fall from 5740 - 4796 which can be a 500 - 600 point rally on the Nifty.

3. The Retracement levels of entire rise from 2252 to 6338 come to 4777, 4295 and 3812 levels.

4. 4690 - 4740 were the previous highs in the rally which started up. So, this area can prove to be a support zone.

5. All the indicators are now touching levels last seen in Jan 2009. So, either we bounce in a day or two or go much deeper.

6. The 200 week moving averages were last broken sometime in Sept 2008. We are now testing those averages. A weekly close below 4930 spells gloom.

7. On the upside, 2 gaps need to be closed. 4946 - 4846 and 5323 - 5204.

In a nutshell, now is the time to prepare shopping lists and nibble at stocks. The Diwali shopping list which we prepared last Diwali can be a good starting point for stocks.

Nifty Tops and Difference from the Moving Averages

Lets see the last few times when the nifty hit major tops and its behavior after that. Thanks to Natasha for suggesting this line of analysis.

1. Lets take the 20, 50, 100 and 200 MA and the distances by which they were above the Nifty in percentage terms when the markets hit the Tops. As each next top is hit, the out performance is steadily coming down. This implies that the rises are getting slower.





2. Next I took the falls after each rise. They have more or less have been same, slightly decreasing. Assuming that 5550 was a top, average of last 3 falls gives us a target of 4920. I would put a target in the range of 4920-4950.



3. Lets look at the channel we have been moving in for almost past 1 year. Logically, now that it has touched the upper end, the immediate target should be 4950-4980 in the next 5-6 weeks.

4. The interesting part comes after we come to the lower end of the channel at about 4950. The channel width is 600 points. If the bull run continues, the rise should continue. If the channel breaks, the next target comes at around 4350 this is also the bottom made in last August.

5. The FIIs have sold for last 3 days albeit small amounts. This is the first warning sign. Also, the A/D line has been going down. Very few stocks have been advancing to declining. Thanks to Lakshmi Ramchandran for the graph.



6. The condition for break of 20 EMA has been fulfilled as in the graph attached. Now, it should move up to the 20 EMA or slightly above and then fall. This should take us to 5460-5480 in the early part of the week before falling again.


To sum up, the Dow has just fallen away with no bounces. A sell-off in 9 out of last 12 sessions for no apparent reason. Its not as if any Bank has shut down, or European crisis. Gold has risen to almost all time highs (just about 20 dollars from its previous all-time highs). RIL has hit 950 a 52 week low when the Nifty is near its 52 week high.

All the above factors seem to make me just a wee bit uncomfortable.

Editor's Note: The above assumptions are invalidated if the channel broken upwards above 5550.