Reversal Signals emerging !!

Stock market crashes always leave a staggering amount of traders, speculators and others which take vow of never to return to this markets. Bear markets often make stocks speculative and the art of investing, a gamble. History gives us great insight into the mind of 'the crowd' which shows the various points of market indecisiveness.

There has been many instance where firms which were too big to fail, failed and left investors in lurch. It happened with the telephone stocks, railroads, over-leveraged arbitrageurs of 1980s, technology stocks, real estate and now the auto manufacturer. There is a very important lesson in all of the failures that they have something common. All market participants knew that the physical growth in volumes of there business is a given. It was in fact true. Just see the numbers for the aviation sector by clicking here .

However the aviation sector worldwide has lagged the market for decades and has given very poor return. Real estate boom and bust cycle is far more prevalent and pervasive. In the bull market the expectation of growth is taken as a proxy for growth in profitability and gives fuel to the bullish argument. When traders and investors realize that the profitability is very low, there is a rush to sell stocks at any given price. The age old fashion of asking 'how much' to pay for the stock can be of great help in finding correct sectors to enter.

The Dow Jones Industrial Average has been in a bear market since the begining of the 21st century priced in terms of gold. Take a look -

Source:www.chartoftheday.com

The real test of the current bear market would be at the Dow Gold Ratio of 9. It has not traded below it after the gold window was taken out by Nixon. So if the conditions become worse than they are, this is the indicator to look forward for an early warning. The high yield bonds have been falling in prices and the spread on High Yields have gone out of proportion rising a staggering 770% in one year. But it has bounced of quite substantially in the last few days. Take a look at the High Yield Select Bond Index of 10.

Source:www.stockcharts.com

Any rebound in this index will arguer well for the stocks in general. Now there is an important development that has taken place simultaneously in two different markets.

A - The USD has broken down forming a head and shoulders pattern and a failure of the fifth wave.

B - The commodity index is very near to a breakout.

Take a look at the CRB index divided by the USD index -

Source:www.stockcharts.com

If this reversal holds than it would put the deflationary theory to rest and will give some respite to the continues asset devaluation taking place. The USD has broken down from a head and shoulder pattern and is falling steadily.

Source:www.stockcharts.com

As I have already pointed out that crude oil has bottomed out for the short term and heading higher for some time, it is important to be cautious of the USD index as a reversal in USD may lead to a fall in all commodities to new lows.

USD has been acting as a gauge of the sentiment and a higher USD was showing risk aversion and stock fell in line with it. In the short term the correlation of a stronger USD and stronger equity market is broken. Risk aversion sentiment is ruling the markets. A stronger USD is important for US equities and will lead to stronger growth in world equity markets also. This correlation can give early leads into the markets.

These factors are giving some clues about the strength of current bear market. The economic conditions will worsen even more and more bad news comes in bunches. The stocks however look forward and a fruitful recovery will take some more time.

Indian stock markets have given a small rally of about 7.4% in the last one week. I mentioned in my previous post that this rally can last for about 1000 points. But there are signs that this rally lacks strength as the upmove are not showing impulsive behaviour. S&P CNX Nifty will face strong resistance at 3250 and the inflection support now stands at 2810. A close below this level would take markets lower.

The next two quarters would be the best time to accumulate high value, high dividend yield stocks. Markets would stretched to the downside and give investors the real time to buy which is the best thing about bear markets.

Market Mayhem - rally coming!!!!

S&P 500 just crossed the 910 mark and may well close above it in another half an hour as I am writing this. Dow Jones Industrials has completed its inverse head and shoulders pattern and as I wrote earlier, the October lows did hold quite remarkably in nearly all the markets.

. . . . . . We remain in corrective short term abc of down 5 wave impulse ‘C’. The corrective wave ‘a’ and ‘b’ have ended and we entered the wave ‘c’ on Friday. This may take markets up to the 3500 to 3700 . . . . . . . . On a risk reward basis, it would be favorable to go long with a risk level below 2490 for a sharp upward rally . . . . . .

Indian markets have been quite subdued in the last few weeks due to the terror strike and political uncertainty. The latest slew of measures by the government and the RBI are encouraging as market tops and bottoms are ofter formed when some constructive steps are taken to stimulate growth. I have been quite bullish for this 1000 point rally for quite sometime now. But the time this rally is taking is making me a bit skeptical about it. Though the price formations and still not bearish in the current wave pattern, there are enough red flags to warrant attention. Nifty should close this week positively above 2900 for this rally to last and reach 3500. If this doesn't happen we may well form a triangle in the corrective fourth wave which is in progress.

There are some sectors which warrant attention now. In all likelihood real estate sector in India has seen a bottom. When I say this, it doesn't mean that home prices would not correct. It means the real estate sector stocks may well have seen the lows or are very near to the lows.

There are some important levels in Nifty to watch out for. If prices are able to trade above 2900 and post a daily close, there would be a rally to at least 3200. Important support now stands at 2680. 2865 is the short term hurdle for this rally to gain strength. Next upturn should be swift and sharp and should be on high volumes to confirm the personality of wave 3 in wave c of corrective wave 4 of c of ABC. Get out of gold if it closes below $740. Crude oil may have formed a bottom, 'at last', if it doesn't breach $39.6 on even an intraday tick.

December may give some respite to the bulls.

Crude Oil Wave Count

Crude oil may have formed an important inflection low today when it touched the intraday low of $46.26 on NYMEX. The wave structure discussed previously remains the same. The extent of fall in crude oil is steep and magnified due to severe distress in the financial markets.

The trend still remains quite bearish for crude oil. The Elliott wave structure for crude oil shows that we are near the termination of the first corrective wave (A). An alternate count is possible which marks this as wave 3 of five wave down A. The current Elliott wave count on crude oil is show below.

Crude oil wave count

Long term count suggest that crude oil make take a lot of time to start its upmove again. Oil remains bullish for the long term and its current fall is corrective in nature.

Crude oil wave count

It is quite possible that crude oil may form low of $43.3 before beginning the wave 'B' of its corrective ABC pattern. The overall structure in oil remains bearish but short term analysis suggest that there is little incentive in shorting oil heavily.

Momentum indicators have started giving positive divergence but the price has not confirmed. If there is a confirmation by the wave of a trendline breakout, the conviction of a medium term bottom will be high. Currently the trendline stands at $54.

Crude oil positive divergence

Bullish sentiment in the oil market has hit a rock bottom. Even the most bullish of analyst have 'given in' to the steep price decline. But oil looks attractive at current price with a risk level of $43. 

Market Signals

The USD Index which measures the performance of USD against a basket of currencies has shown a visible negative correlation to equity markets and metals markets. The strengthening USD has been a direct consequence of flight to safety to the US treasury. The money market has improved as lending in overseas markets have again started though the rates are still on the higher end as compared to the benchmark US and Euro Area rates. The TED spread is now hovering around 2.18 percent.

Intermarket analysis shows that a strengthening USD is bullish for US equities. The other leading factors being rising bond prices and a crash in commodity markets. In the current scenario we have three set of factors which are inline with the historical activity.

The US 30 year bonds have rallied strongly showing that US will maintain 1% or below interest rates for next few quarters. The USD has entered a strong upmove, which can last quite a while, though long term bearishness is still in force. Commodity markets have topped out with the exception of gold and crude oil. It is highly likely that we may have already seen the top for most of agricultural commodities for the next one decade.

All this points out to a few important factors. Low inflation, cheap credit. However an important issue for commodity driven emerging markets is the strong USD. Most of the commodity driven EMs like Brazil would not do great in a rising USD scenario. The best of the lot from emerging markets is India.

I think the equity markets may give a strong rebound in the short term can can spend a lot of time in the counter trend rally of the present bear market. The bear market has not given a convincing sign of a final bottom. However, I feel the negative correlation of rising USD and falling equity markets might break in few weeks as risk aversion takes a back seat. We may have formed a low for this month today, only time will tell. DJIA looks set to give a strong relief rally if prices hold 7950 on closing this week.

Gold now looks an appealing sell on a rally to $790-$810.

Zinc may form a reversal pattern in few days, watch it carefully.

A thought!!

We suffered irreparable damage last week. That one long night stretched for nearly 60 hours before our intrepid, brave and indomitable defence forces brought a new day in our lives. Now is the time that we adopt zero tolerance towards terrorism. Its a wake up call, though a very discomforting one, for us to recognize the enemy and be alert. The loss of property can be recovered but the loss of lives of innocent people will remain with us always.

In this hour of self introspection and action for the country we shall remember that our will to achieve our goals and march forward will never die. This poem puts it beautifully.

Jai Hind

Elliott Wave Count on Gold - VIII

I have maintained my bullish outlook in gold for quite a while. In a presentation this year I expressed the view that gold price would rally to $1200 along with the rising USD. Since September gold is up nearly 12 percent and USD Index is up nearly 13 percent. Though both the markets have behaved in an expected manner, the volatility has led to very little trading being profitable. Overall I still feel that the major trend for gold has still not ended and it is resolving into a much stronger trend for a larger time frame.

In the last one month gold prices have rallied up from a low of $680. Elliott wave analysis in gold has given quite a few counts and there is a possibility that we may seen one more low before the next move up.

In my previous post ( Gold Update ) I mentioned that we may have seen the low of $734 as the important bottom in gold. But as mentioned gold prices closed below $730 and made a low of $680. The rise in gold prices which took markets up to $934 came in three wave and the next fall was also in three ways. Take a look at the graph -

In my view a major bearish pattern has been formed at $935 and unless prices go above $950 this latest count will remain my most probable count. On a weekly graph the gold price count looks like this -

We are currently in the 'C' wave of wave 'B' of the second ABC zig zag in gold. The USD has broken down and gold prices have been moving independent of this fact. Any major reversal in USD can lead to severe weakness in gold prices. USD has entered a strong upmove and has formed a bottom for this decade. Long term trend in USD is decisively bearish and in gold decisively bullish. Medium term trend can see the reversal of trend. I am writing this at a point where gold prices have shown immense strength. From a market sentiment point of view I think all market participants have become bullish.

Huge volatility in prices is generally a sign of market weakness. Gold has seen huge amount of buying from a lot of investors and amid the 'Financial Armageddon' gold prices have failed to make a new high. Overall I feel gold prices would find a bottom at $550 if they are unable to hold $640 on a weekly closing basis. On a relative comparison basis gold would be a steal at $600 range for the long term investors. My long term targets of $1200 and above remain the same. But prices need to resolve meaning fully to reach these prices.

In the very short term prices face immense resistance at $832 and $854. If prices close above these levels gold might rise to $880 to $900 before falling to sub $700 levels. I feel any bearish pattern at $850 and above should be used for initiating a bearish price objective on gold.

Market Mayhem - Trend

Previous market alert

Long term

Long term trend in Nifty remains bullish until prices remain above 1200. We are in a corrective 4th wave of primary uptrend. Current price move can be divided into 61.8 and 38.2 of the entire move. Currently Nifty is trading below 61.8% of the entire motive wave. The lower degree fourth wave ended at 2600 and Nifty has bounced back twice from the same closing level.



Medium term

The correction that began in January 2008 is unfolding into a Zig-Zag. The current move is the wave ‘C’ of the corrective Zig-Zag ABC. We have already formed wave 3 of wave C within ABC. The corrective channel formed in May is still holding the price with a one week aberration.




Short term View

We remain in corrective short term abc of down 5 wave impulse ‘C’. The corrective wave ‘a’ and ‘b’ have ended and we entered the wave ‘c’ on Friday. This may take markets up to the 3500 to 3700 which is the termination of 4th wave of one previous degree. Markets would eventually make a new low before the current down trend ends. An alternate count exist which shows that market can make a new low if it falls below 2490 in the next one week. On a risk reward basis, it would be favorable to go long with a risk level below 2490 for a sharp upward rally. Markets may test level of 2630 in the next few days before the next rise.


This count would have to be reviewed and adjusted if market closes below 2490 in the next two weeks.

Is the trend tiring

The USD index which gave an important breakout a few days back has seen volatile moves in the last few sessions as it flip flopped between 88 and 87. The break to the upside should lead to significant rally in the next days or trading sessions. If it is able to trade above 88.2 there would be a strong rally in the USD index to well above 90.

Take a look at the graph -



For the Elliott wave count refer to the graph - USD Index wave count

It is interesting to note that the USD index which is in general positively correlated to US equities is now serving as an important gauge of sentiment. A rise in USD has been accompanied by a fall in various stock market indices in the last few weeks and a make or break day is getting closer. In the next few days either the market would test its lows and recover significantly to its major resistance levels, like 11500 for Dow Jones Industrial, 1000 for S&P, 3500 for Nifty, or it would lead to a severe price erosion. I think the market internals are pointing towards a global rally that will take all participants by surprise if DJIA is able to holds its October lows on a closing basis.

If markets fall in the next couple of days and reach important support levels, there would be good opportunity to the upside in next one month. We are entering a strong seasonal phase in the next week and this can lead to a significant rally in the markets. So buying on any dip with October lows as risk levels may serve very well.

Market Mayhem Alert

Nifty may bottom out between 2540 and 2640. The 'c' of wave 'B' of corrective ABC is in force. A possibility of a 1000 point rally would be strong if market falls and recovers from the above said range. Risk would be a new low below the October lows.

An alternate count scenario

Elliott wave count on Nifty has been quite confusing lately and there are a number of ways to put it. As i had put up a count previously which shows we are in 'C' of a zig-zag, i see another count possible. While discussing the pattern with a friend, this pattern seems to make a better understanding of the count.

The alternate scenario says we are in a double zig zag corrective pattern. The current leg is the wave 'b' of the ABC corrective and we are forming the 'c' wave of 'b'. The current wave might take markets to as high as 3500 to 3700 and then make a new low. Which would initiate the formation of wave 'c', the final leg down of the wave pattern. Have a look -



This count suggest that it would take another 6 months for markets to bottom out if a=b in time and c equals a+b which holds true in general market conditions.

Market Mayhem - Another selling climax

US markets rebounded sharply yesterday retracing 4% of intraday loss to close 5% higher. It has formed two selling climaxes at the same price level which makes the current phase of bear run very weak. The reversal came on a day of key market turn date, a full moon ( may not interest many readers, but markets do turn and take trend on some key dates like the next one is 15 Dec 08). Looking at the graphs for DJIA it seems there is a likely hood of a rally if there is a strong follow up rally today and market rises above its immediate resistance.

Another important aspect is that we are still forming lower lows and lower highs which is not at all bullish. The bear trend is still the major trend and all the rallies can get sold into. The trend still remains down but the weakness of this trend is now evident. Today's price move is important for this pattern to unfold. Have a look at the graph.



USD index which gave strong breakout few days back has seen an important price pattern formation. A bearish engulfing at a major resistance has been formed. A follow up candle may lead to a truncated 5th wave of the Elliot wave pattern that was discussed in the last post. Follow this link

Indian equity markets have seen severe fall in the last few days. Elliott wave analysis shows we are in the smaller degree 'C' wave of the corrective 'B' wave of ABC pattern which is unfolding to take markets back to 3500. I wrote last time that markets may rise to about 3500 to 3700 range before falling again to lows. India markets may see a strong bottom in place in another quarter. This may hold true after markets rise from today's lows taking cues from overseas markets.

There are a number of indicators which show that India markets are decoupling from international markets. The Mutual fund cash ratio is at an all time high and PE is nearly the lowest for a bear market amid other important factors. As and when the liquidity crunch goes away there would be a strong investment inflow into India markets. One of the primary problems of India markets is now resolving meaningfully, i.e. inflation.

The breakout and the breakdown

USD index gave a convincing break yesterday as it closed above the triangle being formed on the daily graph. Euro pierced its triangle support yesterday and closed below it marking a significant bearish pattern which may now extend to 1.23 for short term or might stretch to 'at par' levels against the USD. Price action may see some test of resistance and support levels in Euro and USD index respectively but it may enter a strong move in few days.

Take a look at the breakout -

Price action to watch out

USD index is signalling a strong uptrend on a break above 87.15. This would coincide with a break in euro triangle. USD has been moving against the major equity markets over a period of time. A breakout in USD may lead to a severe price deterioration in world equity markets.

Have a look at this graph -



Watch out S&P 500 today.

A live triangle in the making

Take a look at this graph -



Euro may retest its lows and may touch 1.20 on a break below 1.27. All wave of the current formation are in three waves which may give a bearish break to the downside. Its wait n watch till the break comes. High risk traders might go short at 1.2940 as well.

Similar Graphs - Similar result

Crude oil, copper and DJIA gave some positive up move signs. None was able to hold to support levels and now has broken down.

Copper and crude oil has given bearish breakdowns. Copper looks set to test its lows and crude oil may decline to $50 if it doesn't go above $65.5 on daily close. Take a look -


Crude oil


Copper


Prices may see some retest of resistance levels before going down.

Three similar graphs

Take a look at these three graphs ( open in new windows separately)

Copper



Crude oil



Dow Jones Industrials



All these three graphs have a few things in common.

- MACD has given a crossover from very oversold levels.

- A double bottom is formed in Dow Jones on a daily chart, crude oil on a 240 minutes graph and copper on an hourly graph.

- Dow Jones is nearing its short term resistance level and RSI is getting into a congestion zone; Crude oil has formed a bullish engulfing pattern with a strong break on the RSI; copper HG has tested $1.78 three times in the last three days

There is a possibility of a significant rally in crude oil and copper as i mentioned in the last crude oil post. Short term resistance level of $72 was the top yesterday and $76 may see some more profit booking.

Copper is looking set to touch $2.08 and $2.25 after that breakout.

Money market conditions

In the last few months the Federal Reserve and other central banks have tried to ease money market conditions by lowering interest rates. Every country in the world is on an interest rates cutting spree.

This table shows the recent moves of major central banks.

TED spread has been seen as an important indicator of money market liquidity conditions. There is another important indicator which can reflect the liquidity conditions in interbank market. The LIBOR-OIS spread. One of the recent Fed article explains -

The LIBOR-OIS spread has been a closely watched barometer of distress in money markets for more than a year. The 3-month London Interbank Offered Rate(LIBOR) is the interest rate at which banks borrow unsecured funds from other banks in the London wholesale money market for a period of 3 months. Alternatively, if a bank enters into an overnight indexed swap (OIS), it is entitled to receive a fixed
rate of interest on a notional amount called the OIS rate. In exchange, the bank agrees to pay a (compound) interest payment on the notional amount to be determined by a reference floating rate (in the United States, this is the effective federal
funds rate) to the counter party at maturity. For example, suppose the 3-month OIS rate is 2 percent. If the geometric average of the annualized effective federal funds rate for the 3-month period is 1.91 percent, there will be a net cash inflow
of $2,250 on a principal amount of $10 million [(2 percent –1.91 percent) × 3/12 × $10 million = $2,250] to the bank from its counter party.

A bank borrowing at the 3-month LIBOR rate of 2.10 percent that enters into a swap to receive at the 3-month OIS rate of 2 percent has a borrowing cost equal to the effective federal funds rate plus 10 basis points. Entering into the OIS exposes the bank to future fluctuations in the reference rate. However, the bank can guarantee
itself longer-term funding while still paying close to the overnight rate. Because the alternative would be rolling over the funds on a daily basis at changing overnight rates, banks are willing to pay a premium. This is reflected in the LIBOR-OIS spread (defined as the difference between the LIBOR rate and the OIS rate) shown in the chart.



In times of stress, the LIBOR, referencing a cash instrument, reflects both credit and liquidity risk,1 but the OIS has little exposure to default risk because these contracts do not involve any initial cash flows. The OIS rate is therefore an accurate measure of investor expectations of the effective federal funds rate (and hence the Fed’s target) over the term of the swap, whereas LIBOR reflects credit risk and the expectation on future over night rates.


Now, the US Federal Reserve has been able to correct the yield curve by bringing the near term interest rates down. This has been achieved by lowering the Fed Funds rates but it has not been able to reduce the strain on the illiquid money markets.



US T bills have seen record inflow as investors preferred US T bills for safety of investments. Secondary market rates for T bills in US has gone below 60 year low. Have a look



As and when the interbank markets return to normal liquidity conditions there would be a huge inflow of money into other asset classes.

Crude oil conundrum

Crude oil prices have given their first weekly positive close in last five weeks. There is little evidence that the downtrend has ended but a positive bias is now emerging in the markets. We open up the next week with a new month. So there could be heightened activity in the crude oil market on Monday.

Over the years I have seen enough sharp swings in commodity markets when a new calendar month begins. There are two important developments in the long term crude oil price graph. The long term trend line has not been breached untill now and prices are oversold to the highest degree compared to last seven years. Have a look -



Crude oil prices are expected to move up to $72 and then $76. Current rebound may last till $80 and we may see some selling pressure at those levels. $63 should hold as a strong support if this upmove has to last.

Market Mayhem - Decline resolving

Equity markets have never be more correlated. World stock markets have performed equally bad in comparison to each other in the month of October. The US markets have given their worst ever October performance and there is little respite in terms of price rise as yet.

Indian equity markets along with the other Asian markets were hammered down beyond belief. The 'bad news' has started flowing in steadily now as the bear market unfolds. Equity markets would bottom out much before the real economy, as is the case with all bear markets. However there are a few important factors which are giving disturbing long term signals. The inflation expectation of the whole market seems to be one of severe deflation. The yields between regular ten year treasuries in US and the treasury inflation protected securities (TIPS) stood at an incredibly low level of 0.92%. This means the US treasury market is signaling a remarkable slowdown in price rise and in reality is pricing in a falling price scenario. If high inflation is bad, then deflation is even worse.

Another important market that is falling significantly is the gold market. Gold prices have been falling steadily since last two weeks and there is little momentum in the prices as yet. Though chart studies show $700 to be a important support level but the record rise in Gold ETF redemption's have put a question mark on the sustained medium term uptrend.

As I wrote previously that god may be starting a fresh upmove towards $1200 mark if it doesn't close below $734 on international spot markets. I was wrong on that part as it closed below $734 yesterday on a weekly basis. Now the important thing to notice is if the inflation expectation in the world economy remains so weak as they are right now, there is little incentive in holding gold in the medium term. The Elliott wave structure suggests that prices can decline to $544 before basing out.

The Indian equity markets have seen a big slide in prices. Price deterioration has been steep in all Asian markets. Indian markets performed badly in the month of October. From a valuations point of view the markets are in a screamingly valuable zone. These prices are suitable for long term investors to make portfolios. Looking at price graph for Nifty it seems the current uptick will eventually get sold into. Have a look at the revised Elliott wave count.



As I mentioned previously that we are in the final leg down of the bear market which began with a decline from Nifty high of 6357.

The first leg down which ended at 4448
Second leg was a counter trend upmove which ended at 5299
Third leg is the current move which has extended down to a low of 2253

The current fall i.e. the third fall is nearly 1.618 of the total downward move of the first fall.

From the current price levels a further upmove to a range of 3500 to 3700 can be expected. Since we are in the fourth wave of the decline of wave C it can end at the termination of the lower degree fourth wave which was at 3780. There any move to that level may get sold into and then the final leg of the current decline will begin. Nifty has seen a selling climax and final downward move may be truncated and may see formation of a bullish contracting triangle. The fall from 3500-3700 range will give one of the best opportunities in decades to buy into the Indian markets.

It is important to note that we are nearing the 2010 deadline of the kondratieff wave for which Nikolai Kondratiev was jailed. According to his analysis the credit cycle would bust by 2010 and leverage would come down to 10:1 as compared to 40:1. We are indeed working towards that level.

Munch on the credit crunch!!!

A $700 billion dollar bailout plan was on the radar screen of every investor and trader. It came and went. I was surprised by the market reaction. Bear markets have a common trait, all good news is sold into. It happened again today as well. I was speaking and expecting this from the last one week. It was very evident in the FedSpeak and ECB's remarks that all Cenbanks would ease on rates. Again the market didn't move much. Its not important to be a bull or a bear in markets. You just need to be very objective. The current bear market began with two broad important themes -

A. Inflation induced by crude, food and money

B. Stressed interbank markets due to a rise in foreclosures and rising defaults

Investment banks all over the world took a lot of risky loan assets on their books in order to sell it off in the form of CDOs and other leveraged instruments. The underlying loans assets of these instrument were housing loans. Quite a few of them were of inferior quality because banks didn't care about the creditworthiness of the borrower as they would sell these loan assets in a bundled form to investment banks. Underlying loans were quite disastrous like NINJA loans - No income, No job or Assets loans and Alt-A, subprime et al. MTM losses forced banks to raise capital which become scant as Central banks reigened in money supply to ease inflation.

Then came the headlines made famous by the financial press. Toxic debt made the issue even messier. I was quite curious to find an exact number which can define the extent of 'money' that is required to set the mess to rest. There were a few estimates. Like $1.3 trillion net of the toxic debt, $5 trillion of financial aid required, $60 trillion of gross worthless mortgage CDS and $1300 trillion mess worldwide in all sorts of loans.

I really don't know which number is the correct one. I don't even care whether any number is correct or not, neither does the guy who has put in his money in some supposedly 'risk free', 'large cap' stocks. It is quite simple and evident that the total liability of poor mortgages and inferior assets that banks held in their balance sheets is too big to be cleaned up quickly. As I picked up some of the financial magazines for the current week I noticed a glaring similarity between investor sentiment, the crowd psychology and the headlines. The businessWeek headline read - Is it safe YET? The NewsWeek read - It's not as bad as you think! and the rest. In the last one month the sentiment among the investors world over has went from bad to worse, the volumes have suffered considerably, futures in stocks are gyrating like drunkard and all of a sudden the indispensable CRUDE OIL doesn't matter anymore.

Most of us would believe or like to believe that history repeats itself. It is indeed repeating now. We are very much on the some line as we were just 100 years ago. Reading a few books about the great market crashes will let you know that the first decade of the 20th century suffered the same fate as the world economy is suffering now. JP Morgan came to the rescue then and again it stands tall though on crutches provided by the Federal Reserve and the political clout of the US government. There are quite a few articles in economist and the ET on the similarity between 1907 and 2008.

Many banks fail in every big recession and there is a massive slowdown that follows. Credit is the backbone of most business and when it dries up it leave lot of people and businesses very hungry. Currently there is lack of trust which is the life support of the financial system. Banks and other financial institutions have serious doubts over each others financial health and credit worthiness. The action of the US government by purchasing corporate commercial paper is a direct way of lending to corporates at rock bottom rates. This would provide much needed funds to corporates who require quick cash to run their businesses. It would infuse confidence in the system as well.

The U.S. Fed, ECB, BOE and other major central banks moved today to slash key interest rates as part of an ongoing effort to quell financial turmoil. I think this step is a crucial one and a number of cuts will help revive confidence in the system. Though the problem right now is not the cost of borrowing but the availability of credit. The inter bank market across the world are virtually still and there is very little activity that is happening. Still lower rates would increase risk taking capacity and help household spending and business spending in the short term.

Is the main street unaffected by the current crisis ?

If we move to look at the real economy and see what has been the past trends in the bear markets, we would notice some signals. Firstly this bear market has been in place well before the actual economy has shown signs of remarkable slowdown. Most stock indices have been cut in half and there has been comparisons drawn to 1930s. There is little by way of comparison right now. Unemployment in the US is at 6.2%, it was at 25% in few months of the bear market. 4000 banks failed in 6 weeks, 26 have failed or rescued in last one year. There was a glut of inventory, which is quite low at present. To top it all in present slowdown, each commodity has seen a rise in demand in the last one year. So real economy has not suffered as much as the financial part of it due to faulty troubled assets. But it will show signs of slowdown in near future which would be much more visible.

I think its pretty outlandish to think that the real economy doesn't undergo a slowdown if banks fail. It is for sure a hit on everyone pocket as growth slows and wage and price inflation fades. It leads to stagnation or low growth in the standard of living. The current crisis is a mix of things.

A. It was created by cheap loans to people who could never repay. These loans were bundled up as 'assets' and sold to the smart money as high yielders. Some banks were actually trading even the bundles.
B. Inflation forced the central banks to raise rates, which stopped the vicious circle of cheap credit ballooning asset values beyond reason.

C. The world grew 25% more in just 10 years. World population has accelerated to 6.6 billion. One out of every 8 person on earth is an Indian, and 1 out of every 5 is a Chinese. Indian economy grew at an average of 8.5% in last three years and Chinese economy grew at 10.5% for the last three years.

Now the question to most of us right now ( it is actually always the supreme question) is - Where are we headed ?

Stocks indices have come off their highs in a gradual manner which has been steep for some markets like shanghai. There has been a conscious effort from central banks to help stabilize the financial markets, especially from the US, EU and Japan.

In purely technical analysis terms there are very little signs of trend reversal yet. Though my studies say that we are very near to end of price corrections or probably a bear market low. It might take the market some time to recover but the price correction might get over in few weeks time. In my previous posts I have mentioned the fall in Nifty as to be an important part of the bear cycle. All upmoves have been counter trending and surprisingly very short. Threre would be more counter trend rallies unless we have a set low in place. For that to happen we must have some price pattern which hints ate it. I think it is getting formed in the daily graphs of most of the Asian stock Indices.

Talking about levels I feel 3370 should not be broken on Nifty on a daily close. If we close below that level, we will get into further price deterioation.

I will post graphs on Nifty with the wave count. Gold elliott wave count has served quite well in the last 6 months and the current upmove its getting stronger by the day.

I would be posting regularly in the next few weeks.


Sahil Kapoor

Comments are welcome.

Gold update

I am posting along term analysis on gold here. Hold has turned up precisely from the level $734 and that was a significant support as I mentioned it in my last post and some comments. There is really nothing great to trade in gold but to wait for volatility to subside.

Have a look at the following graphs:






Gold price volatility is at its near peak with implied Volatility touching 55%

Gold price has been hit hard by the credit crunch as it plummeted 30 percent from its peak

Bid for safe haven has ignited interest in gold in the last one week

Physical demand is outstripping supply as investors lapped up a record 50 tonnes of Gold ETF in just two days


US CPI rising at more than 4%

US PPI rising at double digit rates

Failure of banks and unprecedented infusion of funds from central banks have made gold even more attractive

Central Banks have pumped in a record $518 bns to curb credit crunch apart from the funds extended towards ‘bailouts’

Liquidation by long only funds due to credit crunch has undermined the safe haven appeal for gold




Gold prices to begin the next uptrend if low of $734 holds

If prices breach $734 on a weekly close, gold prices may tumble down to $640 or lower

Next up move to be laboured

Gold may rise with a rising USD in the next up move

Higher energy prices are here to stay in the long term

Gold and silver price moves are not confirming the uptrend

Next up leg in precious metals would be widely participated but volumes would be less

Inflationary pressure would remain strong as rise in money supply would keep all currencies under pressure

USD and gold may rise together in the next few quarters

Market Mayhem - Bears knocking, will the door open??

Looking at the ominous price patterns that are forming and Nifty plunging by the hour, there is little that an optimist can think off. Though there is a sense of tiredness in the current market move, the downtrend has gained strength. In my last post I suggested that current counter trend rally may move towards 5000 levels and I still believe that it can.

Firstly, form a market structure point of view, we are in a fourth wave correction of the primary upmove. In the substructure we have already formed the first leg down i.e. the A of the corrective ABC pattern. Currently we are in the B wave of the corrective ABC, 3 wave, pattern. Since wave B is also the correction of the downtrend it always happens in 3s. Take a look at the graph -



Now the wave 'a' of the current wave 'B' was in three wave. The wave 'b' of the larger degree B is in progress and there is a formation of a head and shoulder pattern in this wave. Looking at the price pattern I feel market may test 3950 in a hurry if it closes below 4200 on a hourly basis. Most of the downside will be quick and there would be little to hold on when it reaches that bottom.

Looking at the macro picture, the markets are still pondering on to the question of inflation and its impact on India Inc. There has been an incessant decline in INR against the USD. The end of INR weakness is now near. INR may have bottomed out on Friday itself and from here it can only appreciate if it is able to hold onto the 46.2 against the USD. Inflation picture would have been much better had RBI intervened on time and raised rates quickly.

Continuing where I left writing
As my computer broke down after the last para I now see markets trading just above 4000 levels. Expectantly markets have bounced off taking a support at 3955. I feel we may have formed a bottom for the current year or may be the next few months. Although there is a lot of bad news out there, still the pattern says we are at the end of wave 'b' of the higher degree wave B. Hence we begin the strongest upward path to 5000 levels from the lows that we make in the next few days. The important resistance which would see a lot of overhead supply stands at the neckline of the head and shoulders pattern at 4235. I don't see any major trigger for it right now. I feel FOMC might pop up a surprise and bring some 'good news'.

If we look at the price patter closely we have some important things to see.



The measured move of the head and shoulders pattern stands at 3735. It means market can make a new low before rising. This is also in line with the Elliott wave count which suggest we should be forming a flat or an expanded flat as the corrective abc is taking shape in 3 wave pattern i.e. 3,3,5. Now when I say we may form a low this week, I am taking into account the market picture that two of the largest banks have gone to the dogs and there is little respite to the oil bulls. The time is also set for Indian stocks to start rising with oil for reasons which I will write in the crude oil update.

I think we are entering last few weeks of short term downtrend. This doesn't mean we are entering a long term bull market from here but just a strong counter trend rally to the bear market. Revisiting my long term count on Nifty I see another fall in stocks from levels of around 5000 to 5500. This might take a lot of time to end.




News from the western markets in increasingly bad and there is lot of selling in banking stocks across markets. There are very few buyers in the market. The so called large investment banks, who for centuries have been or have managed the 'smart money' is the target of selling this time. There are other few issues as LCH clears Lehman brothers a defaulter. Once markets digest this news there would be some sanity. As of now there is chaos and selling.

Sahil Kapoor
Comments are welcome

Elliott Wave Count on Gold - VII

. . . . . . . . . Looking at the current price levels, $800 and $790 looks important pivot levels which would lead to further buildup of positions in the gold markets. I feel a material damage has already been done to the market as we enter the 'official bear market' in gold . . . . . . . .


http://sahilkaps.blogspot.com/2008/08/elliott-wave-count-on-gold-vi.html

Gold prices have been glued to $790 to $820 range for the last one week. Price action has been very volatile and there is huge participation from bears and bulls at pivot levels. Indian spot markets have witnessed huge demand from jewelers and rural demand due to a good monsoon has been on the higher end. Gold prices have not fallen for the past two weeks in absolute terms. Although the financial press have been writing the significance of a fall in USD supporting gold bears but there has been no absolute change in gold price. USD as measured by the dollar index has risen from a meager 73 to 78 and there is little fall in gold prices. Gold market does not follow USD in lock step but it is largely the sentiment which drives it.

In the long term, Euro is expected to test 1.25 against the USD. It sounds quite outlandish but the charts are looking very weak and USD uptrend is gaining strength. In the very short term, like in the next two to three weeks, euro may rise to 1.46 or till 1.48 as it is heavily oversold.

Let’s look at the price pattern in gold closely



Price pattern are getting into a trend defining range of $790 to $840. I feel a more realistic range in $865 to $790. This range would be a trend defining range for the rest of the year. If prices are able to rebound from this level and move up, there would be an upside to $865 and beyond but this upside would be corrective in nature. The medium term trend has turned down and as I wrote previously the next realistic target is now at $716.

Trading is nothing but weighing the probabilities and being on the most probable side of the price action. As of now gold prices are giving little cues. The best trading setup which is visible right now is to trade a break below $790 or wait for a selling level of $840 to $865. Buying is fraught with risk, but a sharp rebound will make people get up and notice the momentum.



The short term count on the Elliott wave analysis shows a downward five wave pattern which would mark the end of current bearishness and the end of the long term corrective fourth wave. At present we are beginning wave 5 of the downward 'C' wave of the major 4th wave. The above graph shows the possibility of prices plunging to $716 in the next 6 weeks or so. An alternate count will create a scenario for prices to rise to $865 if gold is unable to trade below $790.



Long term Elliott wave count is resolving towards $734 which marks the 38.2% of the primary upmove. Gold market is in a secular bull trend and the current medium term bearish price moves will get exhausted at this level. Price have already fallen below the four year trendline support and another fall below $790 will make $734 a certainty in the international spot markets.

There are three scenario to trade as of now. First is to trade a break below $790. Second is to sell in a range of $820 keeping $827 as a risk level and last to wait for $840 - $865 to sell.

September is the month when USD rebounds and forms reversal and we might have already formed one. Euro may rebound to 1.46 and we should be sellers at that level targeting 1.34. Interesting price action is coming up in precious metals but energy might disappoint trend following traders for a while.

Sahil kapoor
Comments are welcome

Market Wrap

Last two weeks have been highly volatile. All markets saw huge two sided moves as participants faced quite a few economic reports. US jobs picture deteriorated further and there is little evidence of a rebound in the economic activity in the near term in the US. The USD has rebounded against all majors as it is now better to own US$ than other paper currencies.

Economic scenario in western countries looks quite weak and Asian countries have already suffered due to poor western demand for goods.

Energy prices have declined significantly and the trend looks quite bearish in the medium term. Short term trend in precious metals and energy have already seen oversold levels.

Equity markets here in India have been quite volatile and there are signs of short term bottom being formed in S&P CNX Nifty.

I will be posting individual analysis of various markets in the next few days.

Taking some time off!

I am taking an unplanned leave. Will be back in two weeks time. Hope prices resolve meaningfully to give better trades.

Sahil Kapoor

Market Mayhem - Poor momentum

As i began my last post eying 4645 as the important resistance to get bullish, market did cross that level but only for about 5 minutes only to go down incessantly. Though there is little to doubt the ability of this counter trend rally important support was broken today. Now its time to remain cautious as oil fear has again gripped the market participant. Looking back at the crude oil price expectation and gold price outlook, both has behaved in expected fashion. I was expecting a strong upward move with a sharp fall in crude oil price. Crude oil did fall but up move in Nifty was capped by heavy selling.

On the whole the current market scenario is no giving any great trading set-up. I feel price level of 4159 is an important pivot support and market would remain above this support.

My outlook for inflation remains upwardly biased. I have been looking for inflation to touch 14% level and the time is closing in for this to happen. With food prices showing little signs of cooling and crude oil stabilizing, inflation is still very much the important parameter to watch. Equity prices remain weak internationally as Dow Jones break down from a triangle. Dow Jones would target 10,500 in next few weeks.

I think time is closing in when relation between crude oil and Nifty prices go out of order. There is a simple dynamics that oil price rise is being associated with demand growth in China and India. Now higher prices have led to poor growth in these countries. So this relation of crude oil prices and economic growth being negatively correlated is actually faulty. In reality higher oil prices lead to higher economic growth in export oriented economies like China. India is also a big beneficiary of in the infrastructure sector but the effect is some what subdued.

Studying cyclical price and economic developments in India reveals that the economic trouble would continue for some more time. In the very short term I fell September would be an important month as I expect market to gain momentum in September. There is little incentive to sell stocks at these levels and there would be healthy rallies to sell into. Patience is the key.

Crude oil Conundrum - II

As we proudly celebrated our Independence day here in India, a material change took place in the world currency markets and the commodities market. Euro plunged below 1.4700 against the USD and gold price broke an important support which may not bode well for bulls in the gold market.

Interestingly crude oil didn't go down as traders would have thought. Other major traded metals like silver, platinum and else were all down between seven percent to 10 percent. I was watching a major pivot in crude oil. The price range of $109 and $111 may not get broken this month in crude oil. Though it is not wise to go against the trend and buy on any support as market remains in a down trend, still there is room for some trade setup from this price. Have a look at the price graph below -



The current trend may get exhausted at $98 or on extension to $86. Though current price moves have nothing significant but a small reversal pattern appearing on today's hourly graph. If crude oil doesn't make a low below $109, we are in for a significant rally towards $125 to $130 in the next two weeks time. I say this as the probability of the first leg of downward move i.e. A of the corrective pattern may have formed at $111.35 which could have stretched to $109. Unless we close below $109 the probability of a significant bounce is very high as risk rewards favours the bulls rather than the bears. Otherwise if WTI traded on NYMEX closes below $109 a major bearish downward move will begin making all upmoves insignificant.

Looking at the long term graph the prices at clinging to a strong pivot support. Current trading at 113.35 we look at the long term channel and support at $109-$111 range.



Looking at the demand and supply picture the demand for oil has clearly suffered as US demand is down nearly 2.5% on an annual basis for the same period previous year. The short term energy outlook from DOE reveal several statistics which point towards weakening demand. The short term energy outlook estimated a moderate to flat growth in demand and a rise in production from Non-Opec members.



Note from the SHOE - 'If new projects come online as now anticipated, total non-OPEC supply is projected to rise by about 510,000 bbl/d in the second half of 2008 and by 850,000 bbl/d in 2009 compared with year-earlier levels. This compares with a 330,000 bbl/d decline in non-OPEC supply recorded during the first half of 2008'



In the short term crude oil prices would decline to lower levels and make surprise everyone on the extent of fall as it did on the steepness of rise. We should remember that we are in a long term bull market and if price decline to $75 also, it would be a much needed correction in its relentless rise to astronomical levels. Long term (i mean 3 years or more) crude oil is going to rise even faster and the fall would be only counter trend to the long term price moves. Long term demand and supply fundamentals still favour a strong rise in oil price but price never go up in a straight line, there would be trends and counter trends and we may focus our attention on trade setups rather than on big prices swings.

From current levels, unless crude oil closes below $109 there is little incentive to sell. We still remain in a downtrend in the medium term so the upmoves will be counter trending. Price may rise to $125 below starting the next downward move. On the Elliott wave count we may have formed the A of the corrective pattern and may well be into the B wave. Current a small wave 'a' inside wave B looks highly probable to take prices to $117 if $112.85 doesn't get violated.

Gold prices have plunged as per my expectation. August 21 can be a short term reversal day from a trend count perspective. Look for a loss in momentum in gold prices.

Equity price have been a no show as they gyrate in a range in the local markets. I feel upmove have that was sold into was on weak hands and next upmove may be sharp if Nifty doesn't break 4270.

I will put up a post on stocks and on gold in the next few days.

Sahil Kapoor
Comments are welcome

Elliott Wave Count on Gold - VI

In the previous update last month I wrote -

http://sahilkaps.blogspot.com/2008/07/elliott-wave-count-on-gold-v.html


. . . . . . On a longer term basis Gold looks weak and a fall below $873 will make $850 highly probable. Looking at longer term graphs, Gold prices are expected to remain weak for an extended period now. Worst case scenario can take gold prices down to $716 on a break below $845 . . . .


Gold prices have fallen as expected. Bullish market participants have been hit hard and gold decline surprised everyone. I was surprised by the intensity of the fall from $870 to $802 in the international spot markets. $850 had been a very strong strong support and all traders who trade logically or otherwise would have kept their stops at that level which got triggered. Being short in gold from very comfortable level did serve well. looking at the current price levels, $800 and $790 looks important pivot levels which would lead to further buildup of positions in the gold markets. I feel a material damage has already been done to the market as we enter the 'official bear market' in gold.

It is worth mentioning here the August plunge in gold happened in 2007 as well and was quickly bought into. Gold bugs are again expecting the same result this year and any rebound in gold will see some bugs come back into the market. This would result in sharp pull back. We must keep an eye on any reversal pattern on charts which may signal a pull back as prices remain highly oversold. The part of gold fall can be attributed to a rise in USD but it is important to note that gold peaked nearly 3 months before USD turned the tide. This means the fall is not entirely due to the USD.

Looking at the Elliott wave structure we see market nearing an important bear channel support. Take a look



It is not wise to catch a falling knife. We should not buy weakness even at this level unless we see a strong reversal pattern. But strength has to be sold into. Seasonally gold is approaching a strong season. Physical buying in India and other nations will gain strength in September. Gold ETF volumes have fallen sharply in the last one week. There has been some buying in India spot markets but it has been too low and too late. The investment demand for Gold has suffered badly due to low liquidity and its role as a safe haven has been deeply undermined. I say this because in the time of current financial market turmoil and highest inflation levels in nearly last quarter of a century gold has not done too great. Euro has now gone out of favour as investors realize that Euro Area is no better than the US. Euro has fallen gap down and I feel this gap is a material one. Though we may see a rebound in Euro and Gold material damage has been done. Gold overall looks quite oversold and selling may not yield great results from current level of $814.



Its been quite some time since I wrote the price projections of crude oil. Following the count I note that the structure looks weak and bearish. In the very short term $109 may act as a very strong support and may result in a short term counter trend rally.

In the very near term i.e. the current week we may have already seen the lows in gold and crude. Unless we take out the lows there is high probability of a counter trend rally which will be sold into. We wait for prices to resolve and give fresh trading setups.

Sahil Kapoor
Comments are welcome.

Market Mayhem - On the way up?

4645 is the next resistance to watch out for. With commodity price plunging southwards equity markets have started climbing up. As I wrote last time -

. . . . we should remember that the market is in a bear phase. These upmoves are a mere counter trend rallies which would be sold into. International macro pictures are not turning out too great to command attention . . .

I still believe we are in for a counter trend upmove. Markets from here on would go up for some more time and there is little incentive in being too panicky. S&P CNX Nifty has now formed a bullish inverted head and shoulders pattern. The target comes out to be 5160 with a risk level of around 4270.



On the whole the economic conditions are still fragile. Crude oil has fallen sharply from high and will continue to go down over the next few weeks. Inflation expectation has improved to some extent in western markets but I still feel inflationary pressure is too high for comfort in the Indian economy.

The price stability in Indian economy has been a major hurdle in economic growth. Poor price stability has lead to sharp fluctuations of 3% to 4% in long term GDP growth. Indian economy grows within a wide range and leads to volatile expectations as well. RBI would look to tighten even further. The inflation would rise to 14% as previously expected.

It would be wise to go with the trend and buy any breakout above 4680 on daily close and wait till 5000 levels. We must remember this is a counter trend rally and would be sharp and on weak hands.

Note that Gold has broken down significantly and made a low of $850.5 in international spot markets. Our target was $850, so lets wait for a bounce to sell again.

Current posts are short due to some computer issue. I will be writing full posts in few weeks.

Sahil Kapoor

'Buck' the Trend

The reversal is nearing the most important pivot of 2008. Commodities has plunged down sharply. USD has turned sharply against all currencies and the trend is only getting stronger. The USD index is now inching closer to close above 74.8 mark and complete a reversal pattern filling up the exhaustion gap. Have a look at the graph-



The question is whether we are going to 77 in a hurry?
From a traders perspective it does look like a bottom in USD is in place for atleast next one year or so. The overall trend would be one of rising USD and falling energy and metal prices. 'US Federal Reserve is not going to raise rates anytime soon' this is the consensus of most of the market participants currently. However prices are telling a different story altogether. The Federal Reserve is expected to raise rates in September. This notion is actually against the market factoring in the expectation of a no change in Fed Funds rates. I feel smart money is now betting on an interest rate hike as commodities cool off. However Fed will surely have an upper hand in keeping rates at current levels as commodities cool off the the threat of inflation abates.

US data has been rather sticky in terms of inflation. The core inflation has been on the higher end and there is very little sign of slowdown in growth rate of inflation. The futures expectation of interest rates and the course of inflation is best predicted by gold prices. With gold prices cooling of it does seem that inflation is going to cool down over a period of next few months. As I wrote in my previous updates that the threat to gold prices is now very material and there is a big threat of prices declining below $800.

It is important to look what happened last year. Gold and silver formed an important bottom in the month of August to start a big upmove. Next month is an important seasonally strong month for precious metals and USD has given a strong rebound towards important levels.


EUR has suffered material damage and looks set to fall to 1.4600 against the USD in the spot markets.



JPY has broken down against the USD. JPY now targets 114 in the short term and 121 in the long term.

USD is now getting stronger and if dollar index traders above 75.6 for a week or so, we would see a dramatic sell off in commodities.

Next Market Mayhem post will be published in next two days.

Sahil Kapoor

Metals Market Perspective

Base metals have broken key support levels. Copper prices again failed to hold the important pivot point of Rs. 330 on MCX and $3.50 on Comex. Copper prices are expected to face huge selling pressure on any rise towards Rs. 335. Copper prices look bearish and next expected support might come at Rs. 300 on MCX.

Last time I had mentioned an Elliott wave in copper which is now clearly violated. This means we have entered a downward move in copper. On the physical demand front, the sentiment has suffered due to falling US demand and emerging weakness in the Euro Area housing markets. The demand from Asia is still strong and has supplemented any weakness in the western markets. We should be net sellers of copper on any rebound to Rs. 326 to Rs. 330 with a risk potential at Rs. 337. Prices may touch Rs. 310 and Rs. 300 level in next few weeks.

Aluminium prices have broken down. But the overall trend still remains upward. Aluminium has been hit hard by the falling crude oil. In true sense it is just the sentiment that has gone against the bulls in aluminium. The long term trend is still pointing towards out performance in the current year. Rs. 120 is an important support for aluminium in INR terms, with $2800 being the pivot support on LME.

Important to note that Gold prices are down nearly $90 from the selling levels I mentioned in my previous updates. Next support now stands at $875. FOMC would be crucial to warrant any rebound.

Market Mayhem - Inflation blues or an impulse?

The Indian central bank, Reserve Bank of India, said fighting inflation is the most important agenda. Central Banks across the world have an important role in price stability. RBI has been behind the curve and this move is quite an important turning point in the macro economy of India. I have repeatedly mentioned inflation, INR depreciation and the health of the central government as the three important drivers which would give hope to the long term investors. In the last two weeks, we got some answers.

The government at the center survived a rather scary opposition in the confidence vote and markets took it as a positive. Though a fall in the government at the center would have been equally good if the opposition didn't think of forming a government with unprecedented parade of regional parties. On the monetary policy front the RBI raised rates showing willingness to tackle the inflation problem. INR too appreciated by nearly 100 paisa in the last three weeks. All these factors have to hold in order to give some credibility to the current upward momentum.

Dealing with inflation is now an important policy issue. RBI has been using interest rates to cut aggregate demand and this step is important to reduce excesses in real estate, infrastructure and credit growth. Tightening the money supply would lead to lower demand, lower propensity to spend and a clamp down to wage growth. However, very strict monetary policy measures is not cure for such high level of inflation. The Reserve Bank should look for reducing credit growth in housing sector as it appears to be overheated. INR appreciation should be used as an important tool to tame inflation. This would mean spending Forex Reserves to appreciate INR and reduce the burden of high energy costs and cost of some edible oils.

Though the markets have indeed given an important rebound from lows and look set to rise to some important levels. In the last update I had marked an extension of the downward trend, but it turned out not to be one. As I still continue to see my previous base count as the most probable one, the expectation that we might have seen an intermediate bottom looks strong. Does this mean the broader index should move only up from here ? The answer is NO.

Lets have a look at the long term Elliott wave structure of S&P CNX Nifty -



The primary cycle in this upmove is shown in blue with primary trend shown in purple. We may have formed an important low of the 4th wave of the primary impulsive wave. Whether this is just a three wave downward 'A' or the complete '4' is the important question. From 'Time' considerations, it looks like just the 'A' wave of the primary ABC correction. It may resolve as a flat pattern, that is nearing its previous high, or an expanded flat, making new highs and then falling.

Another very important aspect to note is, we have still not come out of the corrective channel of this ABC correction. This reduces the probability of my present assumption.



The corrective channel -



If S&P CNX Nifty is able to clear 4680 mark on a daily closing basis with higher volumes, the probability of an upmove to 5000 would be on the cards. The current rally may face strong resistance at 5000 and 5300 levels.

Still we should remember that the market is in a bear phase. These upmoves are a mere counter trend rallies which would be sold into. International macro pictures are not turning out too great to command attention. The US economy is witnessing poor growth, high inflation and high unemployment as well.

Misery Index (10.52) = Unemployment rate (5.5) + Inflation rate (5.02) as of June 2008

The above index shows the problems that the US Fed faces as it tries to clamp down money supply. With very low rates and a poor housing market fraught with high default risk and a more than a hundred percent rise in foreclosures the choices are very few. The current prudent choice is an appreciation of the USD and a clamp down on growth along with a raise in short term rates.

The Housing and Economic Recovery Act of 2008 in the US which has been signed into a law would provide some short term relief to the troubled banking market in the US. The point is US economy is in doldrums and recovery would take time. But the cost of recovery is still uncertain and markets would remain jittery.

The Euro Area is no exception. Retail sales in Euro Area are now decelerating and the housing market is on a brink of a steep fall. A fall in Eur against USD would be a devastating blow to the hawkish stance of the ECB rendering it helpless against inflation. The Federal Reserve has already begun its march towards a strong dollar and this would spell havoc for the growth in Western First world.

So growth prospectus in the world market are not promising which would keep any strong impulse capped. Indian market are expected to do well in falling crude oil and rising INR scenario than other markets.

Another important development is the latest acts of terror on the Indian soil. Though cowardly, these incidents can infuse fear in the minds of general public and result in lower demand at retail establishments. The outcome of a fall in demand and retail level for services such as basic goods, entertainment and hospitality. These are the sectors not to be in at this time. With higher interest rates and a tighter money supply, the current situation doesn't look convincing of a strong growth period.

Utilities are smartly up from lows and looks convincing from a long term prospective. Tata Power looks an important pick.

From a technical analysis point of view, Nifty may rise strongly on a rise above 4680. Support is now building up at 4155, the important pivot of this whole move.