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:
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.
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.
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:
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.
After a rather weak and jittery 2 weeks, we have had a nice rally all across the board. The FTSE, Dow, Bovespa, HSI and the Sensex all made signifcant highs while the Nikkei was marginally high.
Does this mean that this is a time to buy?
As we know, whenever we have a downturn, the markets always build a base. As we haven't built a base yet, it's still not a time to turn bullish. It will be interesting to see what happens in the pull back. Will the prior lows hold or will we go onto breach those lows.
As we had noted that this week we will probably be marginally higher, we were off by a small %. However the nature of the rally has been ferocious.
At this point, inspite of the good picture all around, we will continue to exercise caution and still believe that we should breach those prior lows and build a base. From a medium to long term perspective, it will be good for us to have a little more correction before the bull run commences. Else we will have a suspect rally which has a higher chance of failure.
We sold off the remaining position in USHBEL today at a price of 273.5. With this we have no long positions in any of the markets.
Our only position is a short in AKS.
As expected, the markets have tumbled over the last week. All markets, with the exception of China, have really taken a beating with the US, FTSE, Bovespa and Nikkei taking a pounding through out the week. The Sensex and Hangseng held out till the middle of the week before going down.
Now we can do a calculated guess on the probable bottom scenarios for the markets using a combination of Wolfe Waves and prior supports. Pls note that this is an academic exercise. This week should be slightly quiet and might end up flat or slightly in the green.
The targets are indicated in the charts with the Pink Circle.
DOW:
The Dow looks like it should bottom around 12750(which is the prior top) and the Wolfe Wave coincides nicely with this as a bottom.
S&P500: The S&P500 closed the day at the prior top around 1460. We need to go slightly lower to get the next support around 1410 and the Wolfe Wave targets coincides around this target.
FTSE: The FTSE has already taken a severe pounding this week. At 6200, it might be close to its bottom though we might see some further downside. If this breaks, the next support should be around 6000.
Sensex: The Sensex held its downside for most of the week. But all this was wipred out on Friday. Opening with a 300 point gap down, the Sensex closed the day almost 600 points down. The probable target for the Sensex is around 13500, where the Wolfe Wave meets with the prior resistance.
A few days back we noted that FTSE will be the index to watch. Needless to say today's weakness on the US markets was triggered by the FTSE.
Compared to this, look at the media headlines after today's crash on the DOW:
Dow Sinks 226 on Mortgage Market Worries
Headline for the crash on FTSE:
FTSE down on subprime lending woes, US market drop
The reality is that the FTSE was down almost 1% before the US markets opened. When the FTSE closed down 1.9% for the day, the DOW was down only 70 points. It was only towards the close of the day that the DOW plunged.
Watch the FTSE - it's been showing weakness for some time now. From what we can make out, for the last few days, the DOW follows the FTSE and tomorrow Asia(maybe excluding China) should follow the DOW.
Also take a look at the chart below. Previously, though the FTSE moved below the 50EMA, it managed to close very close to it and subsequenly recovered. However after today's plunge, it has blown past the 50EMA and the next support is the 200EMA with the 50EMA being the obvious resistance.
Let's do a Wolfe Wave analysis on 3 indices - FTSE, S&P500 and BSE. This exercise will be split across 2 parts - the first part will cover the Wolfe Wave analysis in recent history. The second part will be applied on the possible scenarios that we can expect in the coming few weeks.
The Wolfe Wave:
In technical analysis, it is a naturally occurring trading pattern present in all financial markets. The pattern is composed of five waves showing supply and demand and a fight towards an equilibrium price. These patterns can develop over short- and long-term time frames such as minutes or weeks and are used to predict where a price is heading and when it will get there.
With that in mind, let's apply the Wolfe Wave to 3 Indices.
FTSE:
BSE:
S&P500:
Let's look at the Magic Numbers at play on the Sensex. This exercise will be split into 3 parts - The Feb Correction, The March Bottom and The June Breakout. For the 'Feb correction' all numbers are in place and they are being used to show how important these numbers are. The 'March Bottom' and 'June Breakout' are still ongoing and the top is assumed at 15675.
The Feb Correction:
This can be seen from the charts and it is self explanatory. Starting at the top of 14724, the 38.2%, 50% and 61.8% stand out as very important numbers to the 100% mark at 12316.
The March Bottom:
This number sequence starts from the bottom at 12316 and the top is assumed at 15675. With this in mind, the numbers work out really well. We see:
1. The 61.8% mark acts as the first resistance to the upmove.
2. The 38.2% mark acts as the first support to the upmove.
3. The 50% mark now acts as the support to the upmove.
4. The 61.8% mark now acts as the final support to the upmove.
The June Breakout:
This is actually the Magic Numbers in the 68.1% to 100% region of the 'March Bottom' chart. We see:
1. The 0% offers the first strong support to the breakout.
2. The 38.2% mark sees the close of the doji.
3. The 61.8% mark offers the final support to the breakout.
The markets broke down in the early hours and then pulled back strongly to close the day marginally down(DOW) and marginally up(India). However the FTSE was down almt 1.4%. Increasingly we feel that the FTSE will be the index to watch.
With today's close, the FTSE closed below 50EDA and that raises a strong red flag. However we have veen bearish for a while and the markets have moved abt 2-3% since then. So we will keep our short positions light and watch what the markets have in store.
Attached below is the 'MAGIC numbers' on the FTSE chart. If the numbers fit well, then we have already seen the top and the bear is tightening its grip on the index. If FTSE breaks, the rest should follow soon.
Contrary to our bearish views, the DOW zoomed past the mark that we were watching - 13710 to 13870 and closed at 13860.
At this point, we still remain bearish and though the indices don't look like stopping, we will remain on the sidelines. Our short of AKS is in the red by abt 5% and that remains our only position.
India:
We have had a beautiful start to the day. However it has opened with a gap-up and this marks the exhaustion gap. We should see some weakness here. In addition to this, it is now at the rising channel and should come down from here.
We bought a few more options yesterday and our average on all the option is now 74. Though the exhaustion gap is a bearish sign, we are not sure if we need to add onto our positions as corrections usually don't begin in the third week of the month. In case we decide to add onto our positions, we will update the same.
Since the Index has crossed the 15100(Sensex) and 13710(DOW)mark, that we were observing, it is really something unexpected. We don't see a reason to enter the market right now, apart from going short. Since the market seems to have a mind of its own, we will keep our short positions light.
Today, we will discuss how profitable and risky the game of options can be. As you might be aware, options are inherently a high risk/profit instrument. In addition, their inherent loss of value thru time decay makes us use options very rarely. Before we go into when Options need to be used, let's take a look at yesterday's trade.
For instance, yesterday we bought the 4400 July PE at 85 when the Nifty was trading at 4400. Though the Nifty did close later in the day at 4387, ie, 13 points down, the put actually closed at 75, ie, it had lost some value because of time decay.
The lesson that we can learn from this is that - Options should be bought near to the close of the day and need to be sold in the early hours of trading. Also options should be used when a large swing is to be seen. We used options(call) in early April because we saw that a huge swing was in the offing and had fabolous gains. Similarly we use them now because we feel that the trend is changing to the negative and we see a good swing in the downward direction.
If, for instance, we had traded options in the month of May, the profits would be very less, even if we got the index movement correctly, because the time decay would have eaten away what little movement was made by the indices.
That being said we will put an order at 49 for 4400PE today and we will see if it will be executed. This will be the last of the options that we will buy.
We bought Nifty 4400PE(Jul 2007) at a price of 85. This is a positional call.
Today is the Infy results and will have some definite impact on the market.
Market recap:
The DOW and FTSE had a bad day today and down almost 1.2%. The resistance that we have been talking abt, came into effect and sent the markets tumbling. In addition, we feel that this is definitely the start of the correction and as can be marked on the charts, the logical first target will 13000(38.2%). Also take a look at the RSI. The band, as shown in the chart, has been acting as a resistance and support. So far the resistance has worked. Will the support work? Refer the chart for more details
The Nikkei and Hangseng, though down almost 200 points at one time, have recovered marginally.
India:
Today is the big day - Infy results. That being the case, the global markets are sure to put pressure as well as we were at strong resistance.
In addition to the resistance, take a look at the candlesticks. We had a doji(Point B) and a bearish engulfing (Point A and B). Both are bearish patterns and go in line with our bearish view. Notice the candlestick pattern once the RSI starts moving down - Doji and bearish engulfing in both the cases. Refer the chart for more details.
Depending on price behaviour we might build short positions today. We expect the market to hold up in the morning because of the Infy results and then subsequently go down. If that is the case, we can build some short positions today.
As we have previously noted, we have the following view on the markets:
We saw the red signals yesterday and accordingly started moving into cash. Let's see what we can expect:
The DOW and the S&P500 both closed almost unchanged. However the Nasdaq was up .45% and closed at 2656.65. With this the Nasdaq has the hit the 38.2% retracement of the corrective from its 2001 peak. It is natural for this to be a very strong resistance.
The DOW is stuck in a range and it can move either way. However we feel that most likely way is downward. Accordingly our bearish view continues as before.
The Nikkei and the HangSeng both opened in the red. But the Hangseng has since recovered.
India:
Up strongly in the morning, the Sensex hit 14964 and then went down from there almost 230 points to hit 14730 before recovering from there to close marginally down. The resulting doji leaves a very bearish cloud hanging over the markets. Accordingly we moved signifincantly onto cash, with some holdings still left (Click here for current holdings and past performance).
Charts:
If we see the charts below for the Sensex, DOW and the Nasdaq, you will see that all 3 are now hitting resistance trendlines. They have also shown the doji on the charts. The markets remain overbought and our preferred view is that they should correct. See the chart for more information.
We sold another 25% of MORGOK @ 477 and 50% of our second position in BANIND @ 219.5.
No puts as yet. We will initiate puts once we have started trading below the channel that we talked about.
We closed out our old position in BANIND at 221.5. That leaves us with the new position we started at 192.
We sold another 25% in MORGOK. Average price of 481. That leaves us with 50% position still remaining.
The Sensex crossed our expected target of 14950 to hit 14964 and thereafter it broke 2 criteria:
The long awaited DLF listing is going to happen today. All the factors point to a good listing:
We made a new high on the Sensex. However before we get into a discussion on that, let's look at the US markets.
The DOW closed up abt 45points. The narrow 20EMA-50EMA band that we spoke about has been broken. However, as we have maintained, we still maintain a bearish view. Previously we said we will change our stance only on hitting new tops. However we are going to change the view slightly. We will now go bullish again on breach of the trendline(refer Chart). Giving it a slight leeway, the new mark for the DOW will be 13710 . We still remain highly cautious and still maintain that we will open up the Wave C downwards shortly.
India:
The new highs that we had been talking about, has been made. As peviously stated, we will now look for topping signs. The new target to monitor will be between 14950 - 15100. Once any of this has been reached, we will monitor for topping signs. A suggested strategy will be to sell calls instead of buying puts. However we will watch the action instead of building our own conclusions. Take a look at the chart below for some understanding of crucial resistance and support.
In this post, we will deal specifically with DLF and some sister REALTY stocks.
As we all know, the DLF IPO will list this week. We will take a look at 2 realty stocks - MORGOK and UNITECH, we will see that they have just broken out of a triangle. The volume dry up as the stock moves lower is also bullish. With this IPO listing on 5th July, we should expect some good moves in this week.
Please take a look at the chart for more details.
As we saw, over the last 2 days of the previous week, the DOW jumped over the 20EMA, briefly, before settling back within the band of the 20EMA and 50EMA. Our bearish stance on the US markets continues and accordingly we took some new short positions. The bearish stance will be lifted only if we cross the previous high at 13740.
India:
An interesting movement happened in the Sensex on Friday. The falling channel was conclusively broken and we closed at 14650.51, abt 80 points above the falling channel. We can now expect lifetime highs. The falling channel and the gapup around 14550-14575 will be the crucial support now.
But a caution needs to be adopted because of the gap up opening. The first gapup, ie, the breakout(which we had said will be crucial support) was followed by the second gap up opening on Friday. This is called the continuation gapup. We now need to watch out for the next gapup,which is called the exhaution gapup. The moment we see this we will need to be very cautious. However we will deal with it once it happens.
An analysis of some stocks requested by readers:
IFCI: This stock has seen a huge run up over the last few months. The 52Wk low is 7.73 and we currenty stand at 56, which is almost an 800% gain. The stock is moving out from a late stage base. As a result of this we don't see too much upside in this. The stock is also now trading at it's lifetime high(set in 1997). We would suggest disposing of this stock in spikes to 57, though we might see 58-59 levels. However considering that the trade is done using calls, the time decay will negate any gains made. We would advise a SELL and definitely not a buy on declines.
GLENMARK: This stock is moving in a falling channel. Though it might break out of this channel, we don't see too much upside. We advise a SELL at CMP or 665.
KIRLOSKAR OIL: The stock made a 52Wk high on Friday. It might react a bit over the next few days but some upside to 340-350 can be expected.
BALRAMPUR CHINI: The stock is moving in a rising channel. Currently at 76.30, we can expect the stock to hit 85 and we advise a sell at that price.
Stock Followup:
UNIP: We recommended this stock but we did not enter into this trade. It was recommended at 310 and it still stands at 310. Our earlier target of 360-370 still holds.
We initiated a short position in AKS at 37.60. We have put in another short order at 37.75. In this short we are looking at slightly longer period than our other short trades over the last few weeks.
The second order has also been executed. With this our average price is 37.66
We said 'The Indices are now trading between the 20EMA and the 50EMA.' And today too the Index bounced from the lower 50EMA and got capped at the 20EMA. The falling trendline also acted as the resistance to the upmove today. As you can recall, we covered all short positions yesterday. Accordingly the stocks that we track as good short candidates , opened badly and from then went on to close the day in the green, and in some cases up 3-4%. However the bearish stance on US markets continue. We will wait patiently on the sidelines to initiate new shorts. Key technical indicators will be - doji/hangman and long upper shadows.
India:
The good move on the US markets provide us with a good chance to break the falling channel that we have been talking abt. Though we closed in the red, our key level of 14300 was not broken. The falling channel will be convincingly broken at 14600. We will have a relook at new targets if the falling channel is broken.
Another day and the same story. The market were up 100 points at one time before closing in the red. The falling trendline is still acting as resistance. The Indices are now trading between the 20EMA and the 50EMA. Will these 2 create a channel for volatility compression? Our bearish stance on US markets continues.
India:
The question is - Will the US markets hold enough long enough for the mega IPOs to list? Yesterday, interestingly, we managed to move slightly above the falling channel before settling back below it. Our stand continues - watch whether 14300 holds OR we cross the falling channel convincingly. Our preferred view is that we will take support around 14300 - 14400 and cross the falling channel. However if the market lets us know otherwise, we will have to change.
Buzzword: Watch 14300.
We picked up this stock as a short candidate as a contrarian pick from one of the message boards. This was spoken of as a hot stock and we decided to analyze it. And needless to say, it looks like a good short candidate. Note the following divergences marked on the chart:
We covered our yesterday's short of AKS today at 36.20. Our net gain on this is 3.65%. We still some weakness in this stock but for now we will wait on the sidelines to build the next position.
A roller coaster day for the US markets. Up almost 130 points at one time, they then plunged and took support at the 50EMA and eventually closed 8 points down. This is a very bearish sign. Accordingly we have closed our longs and added a short term short position. The only way to be sure that the trend hasn't changed is for the market to close above the trendline that is marked on the chart.
India:
As we mentioned yesterday, things can move either way. However, given the bleak situation in the US markets, we remain extremely cautious. We share below a chart that was first shown by Vivek Patil that shows the formation of falling channel. We will issue stock specific sell calls in a seperate post. Unless the markets show otherwise, ie, breach of the falling channel, on the upside, at approx 14550 or takes support at 14300, we will assume the worst. We will reenter positions once any of those conditions mentioned are achieved.
We sold AKS short at a price of 37.57. This is the initial entry and based on the price behaviour we will add onto this position.
We sold ATHR at 30.59.We had bought this at 30.49 and our gain works out to a measly 0.33%. With this we are out of all long positions in US. We will initiate short positions slowly.
The US markets took a tumble on Friday with the DOW down 1.37%, the NAZ 1.09% and the S&P500 down 1.29%. More importantly it broke the crucial support at 13400.
The coming week and especially Monday and Tuesday will remain crucial. The 50EMA stands at 13291 and that will remain as the next support. Whether this will hold or not will decide what happens next. Given these uncertainities, we choose to err on the side of caution. Therefore we don't advocate a buy on decline strategy.
We might have a mid session market update depending on any adverse market action.
The Nikkei is holding out well. The HSI has broken onto 52 week highs and that is encouraging as we feel the Sensex lags the HSI by a few weeks.
India:
We closed the day sligthly in the red. The adverse reaction in the DOW might suggest some impact on our markets today. However the support we have marked is at 14300. If this fails the next support is 14000. This brings out 2 scenarios. If the 14300 support holds we will go onto make new highs. However if support is found at 14000, we will not make new highs and use the pullback rally to exit our longs.
Looking ahead, if 14300 is held and we go onto make new highs, the ensuing Wave C will target 12350. However if Wave C starts without making new highs, the target will be 12800.
Our preferred scenario is we go onto make new highs and we feel this is supported by the fact of the listing of the mega IPO(DLF) and FPO(ICICI) over the next few days.
We came across this article on Yahoo! Finance - Seven Money Mistakes to Avoid. Let's review this article. Our comments are in Red:
1. Saving with the right hand and spending with the left
DIAGNOSIS: Mental accounting
SYMPTOMS: Keeping a savings account that pays 5% interest while paying Visa 15%; thinking a tax refund equals mad money; obsessing over the price of a new car, but failing to monitor the weekly grocery bill.
We agree to this point to some extent. However when it comes to the grocery bill, I think that's stretching the point a bit too much. Most people are penny wise and pound foolish. They will cut coupons, go 15 miles to save 50 cents. However when it comes to the big ticket expenses, they overlook them. We believe in the opposite concept - penny foolish and pound wise.
2. Playing it too safe
DIAGNOSIS: Loss aversion
SYMPTOMS: Quick to sell winning stocks but slow to sell losing ones; putting too much cash in money-market funds and not enough in stocks; reluctance to trade away what you already have, even for something more valuable.
This is one of the biggest mistakes that people make. As we have repeatedly said - everybody needs to invest. But what we have seen is people view investments only from a 'tax-saving' aspect or to buy a house and refuse to explore beyond this. You really need to be investing in different areas than the 2 mentioned above.
3. Looking into a cloudy crystal ball
DIAGNOSIS: Misunderstanding risk
SYMPTOMS: Putting too much of your savings in your company's stock; having very low insurance deductibles; thinking small-cap stocks will rise forever.
Most people don't understand risk at all. This is also a very neglected aspect in everyday life.
4. Living in the moment
DIAGNOSIS: Procrastination
SYMPTOMS: Failing to enroll in a 401(k) plan; not coming up with a monthly budget; waiting until the last minute to make your IRA contribution.
We think that this point is also a bit of an exaggeration. We believe that the monthly budget, etc is too highly focussed by most financial columnists. Remember that a budget has only 1 use - to make sure that you have the requisite amount of money left for investing. What people tend to do is get so focussed on the budget that they fail to concentrate on building their investment skills. The budget becomes a be all and end all which is not the actual purpose of the budget.
5. Throwing good money after bad
DIAGNOSIS: Sunk-cost effect
SYMPTOMS: Hanging on to a lagging mutual fund because you paid an upfront sales charge; making repairs that cost more than your car is worth; making decisions about how to spend time or money based on how much time and money you've already spent.
Yes, we agree with this. This goes in line with the GOLDEN rule of trading - cut your losses short
6. Letting your ego get in the way
DIAGNOSIS: Overconfidence
SYMPTOMS: Frequent trading; concentrating picks among a handful of "surefire winners"; thinking you're an above-average driver.
We disagree with this. You need to be constantly monitoring your investments. At the very outset, you might lag the benchmark indices but over a period of time you will gradually improve and be able to beat the benchmark indices hollow. Remember you can make money when the indices are going down by moving onto the short side. This is again the beef we have with most financial columns. They look at the market as a one-way, up street. Nobody ever mentions abt going on the short side.
7. Following the crowd
DIAGNOSIS: Herding
SYMPTOMS: Buying ethanol stocks because everyone says they're the next big thing; dumping your stock fund after a steep market decline; taking stock tips from family and friends.
We agree on some points and disagree on others. We disagree when the trend has changed, you better follow the crowd and get out of your long positions. The age old saying is very apt here - the markets can remain irrational longer than you can remain solvent. However where we agree is that you need to get back in the market once the trend changes and the markets start moving up. In fact we believe that buys made during this period turn out the most profitable.
The US markets opened weak and the weakness continued for the first 30 minutes. And guess where it took support?
At 13400, which we had previously mentioned as the support to watch out for.The DOW hit 13398 before recovering from there to close at 13545. The support to watch out for is 13400 and if it holds up, we could cross the previous high at 13750.
The Blackstone IPO will debut tomorrow and going by the demand(notwithstanding the bad news surrounding it) it should do well.
India:
Though we closed at 13499, almost up 100points, we might see some weakness today. The support to watch out for is 14300. If 14300 holds, we should be on the way to 15000 over the next couple of weeks. We will continue to monitor the market for any topping signs.
The 2 sectors to watch out for over the next few dats are Reality(DLF IPO) and Banking(ICICI IPO).
In the post Dust off your bear coat!, we said the DLF listing is today. This is incorrect and the listing date is expected to be the 5th of July. The error is regretted.
A bad day for the US markets today. Both the DOW and NAZ down 1% and S&P500 down 1.32%. As said in a previous post, the previous high is acting as resistance. The DOW hit 13741 before reacting from there.
That being said, we feel this is not the start of the correction that we have been anticipating. The volatility that we have seen over the last 2 weeks indicate that the top is close by.
The Blackstone debut tomorrow should make things interesting. 13400 should offer support and only on the breach of that should we get the bear coats out.
The Nikkei, meanwhile, is holding out well.
India:
The weakness in the US today should get us off to a bad start tomorrow. With the listing of the DLF IPO, real estate stocks will see some interesting action. Gapup on Wednesday at 14300 should offer support for any weakness that we might have today. We have nothing to worry right now and we maintain a hold on existing positions. The bravehearts can initiate a buy-on-decline strategy.
The important thing right now is to watch the bounce on the DOW tomorrow.Just dust off your bear coats, don't wear them as yet ;-)
