Meltdown

In my last posting I had said Nifty was to reach 5170 level. Instead it went down to 3950! So what happened? Why was the reading so off-the-mark?

Two things happened.

1. The sudden and unexpected fall of financial majors in USA spooked the market sentiment. But that also led to huge sell-off by FIIs including those in trouble: Lehmann Bros, Morgan Stanley, AIG is very much probable.

2. The technical development was in the chart and in was mentioned in my last blog. Nifty and Sensex was on a bearish Double Top situation: price stopping at the same level twice. In Sensex weekly chart it had created a very bullish 98% buy signal which can be negated only by a very bearish swing-failure - which, unfortunately, happened. Sensex failed to climb up above the last top even while it came near.

In the process, both Sensex and Nifty crashed a, and as I am writing this to today on Tuesday night, Nifty had survived twice from 3955 levels 2 days consecutively. A bullish signal.

However, I am still looking at 3800 level as the indexes have broken crucial levels and have created a BEARISH Head and Shoulder (as opposed to the BULLISH Inverted Head and Shoulder I had written about in my last post).

Technically speaking, if a very bullish signal fails to produce bullishness in the market, it is a clear signal of a very bearish sentiment suddenly emerging (mostly because of sudden and unexpected event or news). Similarly, if Nifty can beat 3800 for now, we can safely presume that bullish sentiment has won over.

Till then, we just observe the unfolding drama.

Few words on the current crisis: During my stay at UTI Institute of Capital Markets in 1994, I had noticed the recklessness of the young fund managers who had attended the training with me. Made to trade with fictitious funds, these young guys would buy and sell recklessly, without any seeming strategy or system, mostly on whims. I used to wonder how could one trust one' money to these gamblers. As I had seen these fund managers from close, I was never trusted mutual funds with my money. I used to tell everybody, don;t invest in mutual funds. The fund managers may be very qualified but yet, they are not to be trusted.

My thinking was vindicated soon enough in 1996-7 when stock market crashed and most high flying large bonus collecting fund managers were out of jobs and were doing the rounds of companies with their resume, often agreeing to join at half their earlier pay.

It happened again in 2000 when UTI's Unit64 folded up and its head was shunted out with some other senior people, following allegations of financial misdealing.

The same thing happened in USA earlier too. Several times, even with their so tight regulatory laws and so on.

It has happened again. With huge funds at their commands, it was easy to create bubbles. And these fund managers had to create bubbles for their own survival. Otherwise how could they command such fat salaries and huge bonus payments?

I will not be surprised at all if later it was found that the crash in crude oil price was due to unwinding of huge derivative positions held by some of thees mammoth financial institutions or they being indirectly behind the crude oil bubble by financing the large players.

Anything is possible. I remember, a non-functioning company called Hometrade had placed their stocks with UTI at Rs 1020 each. The same stock was last seen quoted on BSE at 0.70p. That's UTI's professional fund manager's contribution.

When I see these companies advertising for people asking for MBA, CA, CFA qualifications, my blood boils. All they require are hustlers.

Readying for a blast...

Fig. 1. Nifty (Click for a bigger view)

Today's (8 Sep 08) rally of 100 odd points in Nifty has confirmed my last blog's optimism.

1. Nifty has bounced back convincingly from it's 50% retracement level of 4209. It has also made a new upper top at 4561 but the sudden burst may lead to some sharp sell-off also.

2. But whatever be in the near term movement, Nifty has now made a very bullish pattern called Adam & Eve Inverted Head & Shoulder. This is pointing to a target of 5170 in the next few weeks.

Inverted (and otherwise) Head & Shoulder patterns are almost 100% perfect in accuracy. In fact, if you scroll down and read my old blog written in 2006 after a 3500 points sell off in Nifty, I had pointed to an Inverted H&S pattern and even as the majority of the analysts were pointing towards 8900 level in Sensex, I said I will bet on a level of a new high at 13,000 or similar.

Fig. 2. Sensex on 98% buy(Click here for bigger view)

3. The Sensex chart on weekly basis has made a 98% BUY signal as per PRISM system (Fig. 2). While Sensex chart is showing a bearish double top around 15125, once above this (if possible in tomorrow's trade will be ideal), Sensex would also race towards the last hurdle (immediate) at 15,600.

The bullish Inverted H&S pattern is pointing towards - hold your breadth - 17,085!!!

These levels are not exact but may vary a bit because the figures have been derived from weekly figures.

On short term basis though, a sell off at several points is still very much possible and is very likely to happen. Those who have been stuck at higher levels during April/May '08 will take advantage of every up-move to exit.

And also the worry about the bearish double top at 4650 that led to a sell-off only last month. Not to mention breaking above 4560 within a day or two.

Experts? Or beginners?

I often wonder why investors and traders act so foolishly when it comes to making money from stock market.

1. They don't want to LEARN.

2. They still have the same age old idea: stock market is for speculation and it is just another form of gambling.

But can't blame them alone too. Learn from whom? Everybody these days claim to be an expert. Problem is, people will also not question whether the advisor is suitably QUALIFIED to provide advice. I have had so many learners having CA, CFA and even a few with MBA qualifications. But these qualifications don't make a stock market analyst. Specially if it comes to Intraday trading.

B they have been in the market for several years, some people consider them know-all, ignoring the fact that they have no formal structured learning of stock market operations and/or analysis. All they have picked up are from people who are similarly unqualified but more vocal.

And listening to the so called experts on TV leaves one with more confusion. They are evasive and always have two answers to every question: from economic conditions to individual stock price movements. Even rudimentary knowledge and regular reading of newspapers/watching business channels allow us that much understanding. Then why need an expert?

The other day at Goa, I was at a seminar organised by one gentleman from Pune on stock market technical analysis. At one point, he exclaimed that he had no idea why Nifty's recovery was capped at 4650. "It must be operators," he observed.

As I had been asking too many questions and disputing him on many points during his presentation, I felt actually embarrassed to point out to him that he had no idea of technical analysis. With some 50 odd people listening to him that would be a grave insult. So I kept mum. Incidentally, the gentleman had organised the seminar to sign-up participants for his technical analysis course next week for Rs 4,000. What would these people learn? Some textbook stuff that are anyway available freely on the Net.

As I charge Rs 12,000 for 3 days and Rs 17,500 for 6 days; that too for teaching a fraction of technical analysis, I don't really have anything to complain about. But then, my PRISM Intraday trading system ACTUALLY helps people make money in intraday trading. Learning technical analysis, per se, is worthless, especially for intraday trading. It doesn't work consistently. While 50% of the indicators signal a BUY, other 50% would signal a SELL.

For more about it, see www.DaytradingFunda.com

Anyway, let me now tell you why it fell back from 4650.

According to my retracement theory (slightly differs from textbook) I teach my trainees, price has to correct minimum of 50% of a rise or a fall. (What happens if it doesn't is another matter that only my paid learners will learn.)

See the chart. It is so apparent.

Click to view bigger

(Nifty Future levels) Nifty fell from 5271 to 3673, 1573, a fall of 1508 points. The bounce back had to be minimum 50% or 754 points. From 3763, that would give a target of 4517, which Nifty promptly reached.

Also, look at the next chart and see why price fell from 4650 level. Earlier, when Nifty was falling from 5270 level, there was a sharp sell off from 4650. See how fast and rapid the fall was, just as a cascading waterfall (you can label this fall as such). As such, when price came back again at that level, the sellers were back in action once more, pushing down Nifty once again.


Click to view bigger

In techincal terms, it is called a double top and is highly bearish in nature.

Incidentally, this level is also 50% of the retracement of Nifty's fall from 5553 on 4 February'08.

What is my reading of the present situation? I am inherently very bullish and have been maintaining that Nifty will scale back very soon. Time scale can be difficult to predict as whole lot of factors are influencing Nifty movements. But looking at some other indicators, my opinion is that there will be a mild recovery but not enough to take out 4650 in the next month or so.

Technically speaking, unless Nifty can pass 4660 on the upside, no upmove will be sustainable. Immediately, 4400 has to be crossed for a bounce back towards 4650 but next week, if the upmove comes, the strength will decide whether Nifty can breach 4660. Downside: below 4160 will push Nifty back towards 3960, breaking of which will lead to a new low.

Predicting up-move in a bear market is fraught with risk but I will guarantee that if Nifty breaks 4650 in September, it will be reaching 5500. Very very rapidly.

But remember, technical analysis is just a tool. It doesn't control the market. Market is moved by collective sentiments of the players. And sentiments are easily affected by news and events.
I will now try to be regular in updating my blog so do come back to see new posts. There is option here to allow you to be informed on new posting by me.

Arunangshu M Lahiri

BINDAAS! NIFTY TO RECOVER TO 3605.

THE NEXT TARGET IS 3605. BET!

Not very many technical analysts will stake their reputation and stick their neck out on such audacious claim but the sign to me is unmistakable. Nifty is heading towards a slow but ultimately rewarding recovery to 3605 level.

Time span? That's the tricky question. But apparently, it is not going to happen in a hurry. The upmove from the bottom of 2595 has not been too bad. It has moved up around 600 points in 17 trading days - roughly 3.5 weeks. But it has not been spectacular also considering that 3 of those 17 days provided 200+ points to the upmove.

The basis of my fairly sanguine view is a very very visible - and large - head & shoulder pattern formed at the bottom. HS patterns are almost 100% infallible and is regarded as trend reversal pattern. HS forming at an upward rally spells doom for the uptrend and would signal the beginning of a downward correction leading possibly to a trend change. But an inverted HS forming an upside down pyramid at a downtrend signals a recovery and often in a change of trend.

I am keenly watching the scenario unfold. You can often come back to this page to find the lastest posting on Nifty's position.

With a series of strong plaforms below Friday's closing price of 3175, Nifty may move sluggishly sideways for a longish period before finally jumping up. On the downside, there are too many supports which should absorb selling pressures, unless some major negative happens.