Weekly Close in the Red

A quick update with some charts: This week we should be hitting the downward sloping resistance and from there begin a downward journey. This will be very crucial and should go onto test the lows we made a few weeks back.

At this point, we will not be buying this market but wait on the sidelines and see the market action in the pullback.

Dow:



Sensex:

Buy Call - US Aug 22 2007

We bought half of our position in CBST today at 24.19. This is a new pick and a more detailed analysis will be done over the weekend.

Short Call - US Aug 22nd 2007

We reinitiated a fresh short in AKS today. The price was at 35.15.

On hindsight we should have waited for a 'red flag' candle.

Base Building and a big red candle

As we expected, it was a very volatile week. All markets had a major crash in the middle of the week with the DOW and FTSE recovering on Friday. Asian markets have started off strongly today.

The end of this correction is in sight. However before the new rally begins, a base will be built. The lows that we have made over the week might be tested. If we look at the charts, we don't see a candle, ie, the close was not at the lows but rather the lows were intraday.

With this structure we can visualise 2 scenarios:

1. The lows that has been formed will be revisited, ie, a new low or very close to the previous one will be made. This will be marked by a big red candle on a weekly or daily chart. This means that the close will be at the day's low unlike what we saw in this week.
   
2. The lows that have formed will not be breached but a quiet period will follow in which the market will oscillate in a narrow range at last week's close. This is called volatility compression. This will be marked by a series of smaller candles on a weekly or daily chart very close to this week's close.

We will wait and observe the market for either of these structures. Our preferred view is the first option listed above. Ideally speaking we should form this either the ensuing week or the next.

We also used yesterday's lows, to pick up some index funds(HDFC Index Fund and HDFC Index Plus Fund) and midcap funds(Sundaram BNP Paribas Select Midcap)on the Indian markets. This corresponds to 50% of our allocation for mutual funds. We will most probably increase our short holdings in the US market over the course of this week.

Cover Call - US Aug 16 2007

We covered our short of AKS today to the extent of 40% at 28.30. Our net gain on this is 25%. We still some weakness in this stock but for now it is oversold. If we get a good price tomorrow, we will cover the remaining. Else we will wait for a rally to initiate fresh short positions.