Elliott Wave Count on Gold - V

Gold prices have declined nearly $70 from the high of $977 which was expected to be a high. Since markets have come down below $910, it shows inherent weakness in the market. The Elliott wave structure called in for a significant decline in spite of bullish sentiment among all gold traders. Strength in USD supported the bearish sentiment in Gold prices.

In the last update I mentioned -

. . . . . . The 'C' wave has 5 wave downward impulse in the direction of the trend. We might have entered the 3rd wave of this downward 5 wave sequence within the 'C' wave. First support level from current price stands at $940 and then a pivot at $935. A daily close below $935 will take us to $910 which is the pivot point of this corrective wave . . . . . .

The Elliott wave count on Gold on a weekly graph suggests the current fall to be the strong 5 wave downward 'C' wave of the larger degree ABC correction.



$880 is the next expected level where prices would take a breather. Presently the prices are expected to face resistance at $918 to $922.

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.

If gold does decline below $850, will it signify that markets are expecting a softening of inflation?

In the longer term it does look like, markets have started factoring in a probability of lower inflation which means US Fed is going to clamp down on money supply with Euro zone economy staring a major slowdown. All this doesn't augur well for commodity prices. Still agricultural products continue to trade on multi year highs and may continue to do so in the near term due to basic demand and supply mismatch. Most of the emerging market central banks are now tightening and western central banks surely doesn't look far from having a hawkish bias.

Price patterns in Gold are again getting bearish. Last time there were atleast three Head and Shoulders pattern formed in gold at around $860 levels which it negated after breakdowns. Gold has formed one again with a $70 measured move at $917 on spot gold. We have a breakdown again and if this holds we might be in for a very strong down move. Risk level in Gold is now at $926 with a sell on rise to $910 to $920 approach. The graphs looks like this -



In the very short term, gold and crude oil look way too oversold and might give a rebound of sorts to sell into. So we should be adjusting our strategy to avoid sudden price shocks as volatility still remains the key in precious metals.

Market participant might also be interested in looking at the cup and handle pattern being formed in gold. This pattern if formed will take gold above a new all time high. The necessary condition for this to happen is that spot gold should not trade below $870. If it does, the odds of this pattern being relevant will be reduced to naught. Risk on this pattern is at levels of $873. So at $880 we should lighten up the positions and wait for prices to resolve.

Exporting hunger, importing inflation

Free economies aim at setting up markets which can adjust the demand supply mismatch and reach an equilibrium price state. But policy markers all over the world are trying to look beyond this aspect and redo the controlled model which was bared of any merits with the fall of the great eastern block. India which is among the largest democracies is the world is not far behind.

India, Vietnam, Argentina, Indonesia, Brazil, and Egypt have banned exports of various essential commodities such as wheat and rice. With commodity price rising skywards there is little support from this factor. Export ban lead to exporting hunger instead of food. Looking at the domestic scenario the countries exercising the food export ban has two motives -
a. To curb the incessant price rise and
b. To try and protect short term supply shocks

However curbing exports would not lead to lower prices of these commodities in the long term. For keeping a check on the long term price stability it is necessary to prop up production. Indian population has grown four times since 1950 and the food grain production has not grown even to that extent. India has a yield per hectare of just 2 tonnes per hectare for rice, wheat and coarse cereals taken together.

Indian poverty line (urban and rural combined according to the latest government and planning commission figures) stands and Rs. 538.10. It translates to Rs. 18 per day. The total production of rice and wheat combined is less that 14kg per capita per annum. Combined price of 250 gms of wheat and 100 gms of rice of poorest quality at market price stands at Rs.3 when uncooked. Still 22% of the Indian population is still under this poverty line. It is still debatable whether the Rs. 18 per day is above poverty line.

There is enough data that can be looked into and feeling awful of the state of the socio economic fabric of the country. Growth in agricultural production, largely achieved through increased yields since the mid 1960s, has dropped from roughly 3 per cent in the 1980s to 1.75 per cent in the first six years of the 1990s, and has continued to decline. On the demand side the calorie consumption in the rural areas and urban areas have dropped some what but the total undernourishment has risen. 40% of urban India eats less than 90% of minimum calorie needs and nearly 50% of rural India eats less than 90% of basic calorie need of 2200 calorie. Rural areas demand higher calories needs to the tune of 2400 calorie but this is fast diminishing.

The problem India is facing and which will become a major hindrance to the growth is the food scarcity. Unless the production is increased readily there is little that can be done to prevent food riots. Food crisis and riots have dominated most of the developing and under developed nations. Have a look at this graph -


pic taken from: www.cambridgenow.ca

Price controls fail miserably in the long term and any agency trying to control prices artificially would eventually fail to do so. Since the world markets are now seeing considerable pressure from the nations which import nearly all their food needs, the right step is to open up the trade barriers and let the market decide the prices. In the short term this might be radical step but it would lead to stabilization of prices as more supply comes in for higher prices. The resource rich economies of the world are trying to impose restriction on international trade of these commodities. If these restriction were to be taken off, there would a large amount of wheat, rice corn, soybean in the markets at elevated levels. This would lead to expected fall in the prices of these commodities. In the short run it will create inflation in the regional economies, however in the longer term this would lead to lower prices. The resource economies such as Australia, China, India, Brazil etc which are rich production of certain commodities will get a boost on the revenue which can be used for development and higher production. However some of the resource economies are themselves insufficient to feed its people which is due to poor investment in agricultural sector in the last few decades. This poses as the single biggest risk to the world economy. However long term love is still love, and short term pain can lead to a long lasting solution. Resource economies need to invest heavily into agriculture to gain benefit of the rising demand which will create the self correcting mechanism and price equilibrium or bring the 'invisible hand' into play.

Since inflation posses the biggest risk presently and to this hypothesis as well, there can be a serious clamp down on the demand for goods by reducing the broader money supply. This would lead to lower demand and less of excesses in certain sectors such as housing and automobiles. However this is not entirely true for domestic economy that is the Indian economy. Indian economy faces greater threat from supply side constraints. The better idea domestically would be to first provide subsidy to agricultural sector by providing better seeds and irrigation facilities. Loan waivers would not solve the problems. A comprehensive system of presenting a stimulus by introducing a voucher system is a much better way of providing relief to the farmers. A standard voucher of certain denomination can be given to farmers. Farmers can present these vouchers to money lenders and eliminate indebtedness. It would be required to first enroll the money lenders in different parts of the country into a single institution. This would eliminate some irregularities that may emerge. most of the India farmers take loans from wealthy money lenders and not from banks. Some pay interest as high as 5% per month and depend on a single crop with Over 60% of India’s net sown area is at the mercy of the monsoon.

Energy is another important factor which is raising the inflation bar and making it difficult for India to jump it. Currently India needs 160,000 megawatts in energy immediately to sustain economic growth. The important step in this direction is to slowly and steadily increase fuel prices over time to avoid future price shocks. This would lead to rationing on its own and conservation will become a norm. Introduction of public transportation would be an added advantage. Crude oil imports in India is rising fast, latest data shows a rise of 8.4% in June over the same period last year. With government raising the tax subsidy to unprecedented levels it is keeping the pressure on the tax payers by compensating high energy consuming entities at the expense of all taxpayers. India's trade deficit widened to 10.8 billion dollars in May 2008 as exports growth slowed down and a 50.8 per cent increase in oil import during the month pushed the overall import bill.The surging oil import bill also turned India's current account balance into deficit of 1.04 billion dollars in the fourth quarter of 2007-08 against a surplus of 4.25 billion dollars a year ago.With this, India's current account deficit rose by 77 per cent to touch 17.4 billion dollars, constituting 1.5 per cent of GDP last fiscal against 9.8 billion dollars or 1.1 per cent of GDP in 2006-07.

If we expose the consumer to real prices of energy there is bound to be major economic changes with potential conflicts. Since smooth transitions are difficult we should make a choice in doing so. Atleast government should continue to raise the prices of fuel by a percent every quarter.

I think solutions lies in taking some drastic measures by the government and the central bank. The need for better economic policy and liberal monetary policy was never so urgent as it is today.

Sahil Kapoor

Elliott Wave Count on Gold - Update

Gold prices declined from the expected levels yesterday and this could well mark an important top in the gold market for this year. If prices go below the $910 mark in the next two weeks or so, we would be looking at levels of $850 and lower. As I wrote in my earlier posts -

A price channel has been in progress from $880 to $990. A daily close below $950 will break this channel and lead to a minimum price fall of $15 to $935 . . . . . . . . . .

. . . . . . . . . . .Now we have entered the 'C' wave of a larger degree according to this count. If gold prices rebound to $970 to $980 we should be sellers with a risk potential of $989. If prices do breach this point, there would be a threat to the count and a re-examination of the prices . . . . . . .

Yesterday's price move does signify the inherent weakness of the gold prices. In the last one month most of the official world newsletters and precious metals traders have given a host of bullish arguments. Though these arguments stand well in the current economic landscape, but markets do not move of what is happening. Markets move on expectation of the future. Gold prices have failed to move to new highs inspite of all the factors which support it being at the extremes. The fresh price moves have also not been very supportive which means markets are expecting the current turbulence to abate and give way to economic recovery.

Gold prices are still in a short term uptrend. Yesterday's closing below $950 has shown the first sign of weakness and a close below $935 will further add to the weakness. Now the $910 is the most crucial support level. Have a look at the graph -



From an Elliott wave structure point of view the markets are now in the larger degree 'C' wave of the ABC correction which is represented by WXY in the graph above. The 'C' wave has 5 wave downward impulse in the direction of the trend. We might have entered the 3rd wave of this downward 5 wave sequence within the 'C' wave. First support level from current price stands at $940 and then a pivot at $935. A daily close below $935 will take us to $910 which is the pivot point of this corrective wave.

The MACD would also give a sell signal if we close below $935 this week.

Crude oil has nearly touched the expected target of $126 as it made a low of $126.37 in the August contract. Look for a counter trend rally to sell. The weekly DOE report might give some better selling levels.

This is just an update I will put up a detailed count on gold and crude as the new price data comes in.


Sahil Kapoor

Market Mayhem - Politics or Policies?

With S&P CNX Nifty closing at 4159 today i.e. the pivot point of 4155 that I have been writing about all along, it is important to take note of it. It also marks one of the single closing bell above the 20 DMA after a period of almost a month. Does this mean we have a bottom at hand. I think it is far from over yet.

In the post investing cycles I mentioned that it is better to be in utilities rather than any other sector. We see a smart run in some of the utility stocks such as Power grid, NTPC and some sort of recovery in Tata Power. This are the sectors which would serve well over a period of time. Now I see that markets may be poised to move up the important pivot which can surely call for a much stronger bounce. The resistance level of 4280 is a very important resistance level. So 4300 should serve as a good level to sell into the strength. More importantly Nifty generally reverses on Tuesday or Thursday so we have to watch out for any signals. However this is just an observation and no rule.

Taking a look at the political angle that has been much talked about and analyzed. I see there has been a very important shift in the political scenario in the last one week. The stock market never likes uncertainty. In face of a no confidence motion and expected downfall of the government at the center I called for a significant bottom in the stock indices. Now this seem difficult. The dynamics that I look for to understand the market expectation is very simple. Market want a stable government. Indian politics is marred by coalition government which is the weakest form of government that India can afford to have. Previously with left withdrawing support, I expected the government to fall. This would have clearly raised the expectation of a right government at the center. But with Left, Right and BSP stitching up a poor blanket to topple the government, the markets would be frightened to see such a coalition where all the factions have different way to doing things.

Today the Indian PM was quite confident of sailing through this no confidence motion in his opening remarks. The markets actually took it as a sigh of relief that if this government stays for now, some hard decisions can be taken.

Well, right, left or centre, all the political factions have ignored the harsh realities of Indian economy. The total central plan spending on agricultural and allied activities, as a proportion of India’s gross domestic product (GDP), is projected to decline from 1.42% in 2007-08 to 1.30% in 2008-09. Currently India faces acute shortage of food which would take mammoth proportion in the years to come. Just read this very enlightening article on the plight of Indian agriculture -

According to the government of India’s Economic Survey, the rate of growth in India’s food production is 1.2% a year, significantly less than the population growth rate of 1.9%. The creation of additional irrigation potential in Indian agriculture was 3% a year in the 1990s. It has declined to 1.8% in 2007.

The point is that investors need a government which can focus on important fiscal measures which would be beneficial for long term solutions to long term problems. Monetary policy cannot act instantly in a country like India which has very low leverage in financial sector. The important problem to be addressed is not the growth slowdown but the inflationary expectations. Indian inflation scenario is not just due to demand pull, most part of it is cost push. So increasing rates would reduce demand but more important is to increase the production. We already know the production of each and every commodity consumed in India is either less than demand or is just at par. Sugar being an exception which would also not be one in few years time. The important measure right now is to curb the excesses by raising rates. But that will do little to cool off inflation and there is little incentive to slow growth as well. That means if money supply is reduced drastically there would be scarcity of business investment as well.

As for traders, strategy should be to sell on rise to 4215. Beyond 4215 Nifty, an important range would break and markets may go higher to 4450 levels and may at beat reach 4660 in few days. But remember we are in a downtrend, it always pays to sell at important pivots rather than buy. Markets trade in the direction of trend for a longer period of time than the countertrend moves.

It is the time that the market gets an answer for questions on important policies rather than speculating about an MP voting for lotus or otherwise.

Sahil Kapoor
Comments are welcoome

Elliott Wave Count on Gold - IV

Gold prices declined from expected levels as there was a lot of overhead supply in the market. In my last update I had mentioned -

"The prices may touch level of $980 in the near term with crucial support now building at top of wave 1 i.e. $935.5. A smaller degree impulse is also in progression which has a target of $985. With two important fibo projections at $980-$985 markets may take a breather there"

and

"The weekly graph looks as if the gold prices are in a corrective wave 'B' of a higher degree flat or expanded flat correction"

By Friday gold gave up a large part of its weekly gains and ended much lower form the weekly highs. Now the market is poised to take an important turn in the next two weeks. If gold declines below $910 there would be a serious dent in the medium to long term bull market as the severe corrective phase make take time. Since we are just into the fourth wave, the time that market would take to turn up again would be significant. In the current week starting this Monday, if gold prices close below $950 it would mark the first sign of weakness and on a further daily close below $935 prices may enter a strong downward push.

A price channel has been in progress from $880 to $990. A daily close below $950 will break this channel and lead to a minimum price fall of $15 to $935. Take a look



Gold price Elliott wave structure is generally supported by a number of Japanese candlestick patterns. We have formed one at the recent high of $990. On Friday the market closed at the price where it opened, forming a doji. If gold turns higher from this level and forms a morning star, it could seriously test the recent high.

Since the current upmove looks like corrective and not impulsive as I wrote in my previous post along with a graph (http://sahilkaps.blogspot.com/2008/07/elliott-wave-count-on-gold-iii.html), the structure has to be adjusted to new data rigorously.

With crude oil cooling off there has been a lot of money flowing into the long gold and short crude pair trade. The gold oil ratio now stands at 7.4 and actually made a multi decade low of 6.4. On an average this ratio should be around 10 taking into account that in the long term this ratio reduces over time. I went in too early into this trade and it didn't serve well. But I think the time is right to buy any weakness into this trade.

Next important target for gold should be $880 if the current count of completion of wave 'B' in a larger ABC correction holds true. Now we have entered the 'C' wave of a larger degree according to this count. If gold prices rebound to $970 to $980 we should be sellers with a risk potential of $989. If prices do breach this point, there would be a threat to the count and a re-examination of the prices.

I will put up a post on Metals Market Perspective in few days. I note that metals have corrected significantly form their peaks. Still neither copper nor aluminium has invalidated its bullish wave count. Lets see what markets has in store and price will guide us to it.

Sahil Kapoor

Crude oil Conundrum

Crude oil prices declined nearly $19 in the past three days. I wrote in many previous posts that a top in energy and precious metals was nearing. I think traders would have sold when markets closed below the important support of $135.14. I mentioned earlier that USD is also nearing an end to its downfall. That it is time to be cautious and not bullish in gold. That the whole dynamics of different markets can change as most markets stand at the brink of getting into a trending zone.

Crude oil prices have completed an ending diagonal pattern. An ending diagonal pattern suggest the end of an important uptrend and this could well be an important top for crude oil. Prices may decline to $102 before making any new top. Lets have a look at the long term price pattern and the market structure:



The crude oil price rise has been parabolic and there is a probability that if crude oil breaks the $122 mark the market will fall like a stone. When a parabolic market breaks it usually retraces the complete run up. The current prices retracement can stretch to $102 in the near term on a daily closing below $120.

The price dynamics of crude oil in the long term remains very strong. Crude oil remains in the long term bull market and it would continue to do so over a decade of so. The current decline would be a sort of correction in the larger trend. There are several pivot points in the crude price moves.

The Elliott wave structure of the current prices moves shows that we were in the 3rd wave of the primary bull trend and may have ended the third wave at $148 and begun the corrective fourth wave. The wave of one lesser degree was the 5th wave which ended in an ending diagonal triangle pattern and is now unfolding into an expected zig zag pattern. It is easier to look at it and understand.



The crucial pivot points in the structure of the wave stands at $126, $122. A break below these levels well confirm a fall towards $100 or lower. I feel the crude oil market has formed a top just $7 ahead of my expected top at $155. At least this is what the prices are telling me when they formed an ending diagonal with a double top and two evening star patterns at the top.



Crude oil prices may rebound to $135 levels after touching $126 or so. This would form the 'B' wave of the corrective ABC correction. A near term target now stands at $122 on a retest of $135 with a risk level of $139.


The fundamentals for crude oil has not changed overnight. As I mentioned in my previous post (http://sahilkaps.blogspot.com/2008/06/dynamics-of-oil-price.html) that there has been a demand destruction of nearly 2 million barrels a day and a supply rise of a million barrel or so, the market has weakened accordingly. Important point to note is that if crude surprise above $139 from here then it would again get into a zone from which it can make new highs. Previously it had formed a double top formation at $120. The current market top looks more promising and a few investment banks have come up with confirmed articles that Mexico is hedging their produce by selling short in the future markets.

Crude oil is now witnessing a lot of overhead supply and once it breaks the $125-126 range there would be a huge pressure of long liquidation which will increase the steepness of the fall. On the contrary we should be cautious for any price reversal that may arise.

Sahil Kapoor

Market Mayhem - Price resolving!

Nifty drifted lower in last one week and made a new low. This has put up a serious question mark on the time that this downward push would take to end. Yesterday US markets saw volatility which was higher than any other day in past few decades. All asset classes moved violently between wide ranges. This is a sign of poor market sentiment.

The Nifty 50 has already come down to level of 3800 which is mentioned on a break below 4155. Since markets have broken the previous low, 3750 and 3600 looks on the cards. Nifty 50 formed a downward flag which could well have been a downward extension in the 'C' wave correction. Have a look at it



I would stick to my previous count and feel that 3800 is an important support and if broken would take markets down in a hurry. Any rise from current levels till 4000 to 4040 would be counter trending and opportunity to sell. If we move past 4040 then prices would resist at 4200. So there isn't enough strength and momentum in corrective rallies which makes the fall all the more intense.

Crude oil fell from highs of $147 to $136 yesterday and the Dow Jones Industrial Average recovered about 250 points from days low. The price action that unfolded yesterday was not good from a technical analysis point of view. If DJIA breaks below 10800 we are in for years of bear market and all upmove would be counter trending in nature. Equity exposure should be reduced if DJIA closes below this mark and gives any upmove. Most markets are standing at the brink of getting resolved into trending markets. Crude oil looks to have formed an ending diagonal pattern. If it breaks below $135 on closing basis, we could see $125 in a matter of hours.

Though fall in crude oil creates such a sentiment that stock indices recover significantly, there is little significance of such a fall. Last week when crude was trading at $137 the sentiment across the markets was bearish and it is still trading at $137 but the fall has made participant optimistic.

Financial and commodity markets look to the future and not the past. So if crude is going to top at $147 then markets would recover and move up as it comes down. However unless crude oil prices decline to about $100 levels there would be little that can end the current crisis. Indian markets are better off than other markets in all other parameters except the impact of higher energy prices. If this gets resolved we can see smart recovery in the stock market indices. As i mentioned earlier if RBI raises rates and INR stops depreciating along with a fall in crude oil price, the Indian stock market should recover.

If WTI crude traded on Nymex closes below $135 mark today or tomorrow there would be a recovery of sorts in most of the equity markets. Otherwise there is very little technical evidence that Nifty may stage recovery any time soon if it keeps trading below 4155.

I feel crude oil, precious metals and some agricultural commodities are in their last upward move and may correct violently in next few weeks or by September. The Euro is on its last upmove and the characteristics of the final upmove are evident in Euro against the USD. It is just a matter of time that these counters reverse and we are getting closer to it.

Equity markets may take time to recover if commodities cool off. The monetary measures may keep a lid on equity prices of some more time. Indian equity markets have value emerging in many sectors for a long term player. Markets reverse before the main street does. It is better to be investing in large caps by building up positions on steep falls as and when they come.

Sahil Kapoor
Comments are welcome

Investing Cycles!

Can't trade, its volatile.
Don't know where it is headed in the short term, but long term is good.
Shouldn't miss the next bull run.
Markets would go up surely in 2 to 3 years.
Best time time buy. Look at stocks, some are down 70%.



These are some of the latest market tantrums. If anybody doesn't want to miss the next bull run, then why isn't the market turning around? Though I am not going to try and explain these facts, but can sure look at past and evaluate what can be in store for us.


The Indian equity markets are one of the most volatile markets from a traders perspective. The percentage changes over a period of month or for years can be quite dramatic. So investing at the right time is an important aspect for everyone.

Most of the people who are not professional investors or traders invest when there is buzz around and buying stocks becomes a fashion. The systematic investment plan or sip is regarded as the holy grail of investing. It is a nice idea for someone who is new to investing but in reality it doesn't serve the purpose it is meant for.

Equity markets tend to move upwards in growing economic scenario for a longer period of time than downwards. For instance the Indian markets have been in uptrend for years since 2001 with periodic downturns lasting for a few months. Now a person who is investing into the equity markets with a sip would have a higher probability of seeing better returns if he invests for a longer period as the probability of market being above the 'average' is higher. SIP per se is not bad. But it is not for people who track the markets or at least invest rationally. Surely it is an easy way to avoid the noise and build better returns than other forms of investment.

Is there a better time to invest in these schemes?
Yes there is surely. I don't like postmortem of the markets, but analysis never harmed anyone. If we make a plan and invest by sticking to it, we can better the odds. We can follow a simple plan to invest our hard earned money into the markets. Lets see what options do we have now.

Firstly look at the real returns. Whether it is wise to consume or save. Currently there is little incentive to invest as inflation is too high. In the present scenario it is better to invest part in equity and a part in debt. Commodities are not an asset class and never will be. Commodities are not meant for investing, they are meant for trading. The best way forward is to invest in a liquid fund and switch all your money in debt to a fixed deposit when RBI raises rates above 10% and FD rates go up. A better way to time the markets is to look at the big corporate houses and look for lean period of demand for loans. That is the time to switch your debt component to FD and lock in a better rate. The corporate debt market is still active and there is still demand for loans. We are no at the top.

Another important point is not to borrow at these interest rates and repay all your outstanding loans. It would be better to pay off the loans now as the value of money is lower with higher inflation. That is what I mean when is say consume or invest.

The other component is the equity markets. It is important to own some equity always if one is not a professional investor or trader. Though Mutual Funds is an easy way of investing as you get some managers for your money. The other way is to build your own portfolio of stocks. The equity markets have a typical cycle which runs in tandem with the economic cycle, but with a lead.



We saw huge run in energy stocks. They peaked off and fell dramatically. We saw huge surge in health care, pharma. Now with these firms well off their peak, it is time to look at utilities. There are very few utility companies to invest into currently but few of them are available. As I wrote previously the better sector for present scenario are energy, IT and FMCG, we can look at specific bets in these sectors. RPL would serve better in energy, Infosys in IT, and ITC in FMCG. Since all these stocks have market beta so they would also correct with the broader market, but they have value to be bought into. In utilities, one should keep an eye on Tata power and Reliance infrastructure. There are other firms which are great buy at current prices such as Mundra Port & SEZ e.t.c.

Since most of the investor like to invest into equiyt markets through mutual funds, it is better to look at funds with allocation to sectors which can serve the purpose of wealth preservation. Since MFs are expected to change to better sector it would serve the purpose of timing as well. Still one should look towards funds having exposure to large cap and consumers (non-cyclical).

Most of the investors who look at markets and frown when they fall are missing out important opportunities. Since economic cycles are periodical, slowdowns and recessions should be accepted as a market phenomenon. There is an important shift in demographics which would result in higher economic growth in the long run. Market downturns gives us to cherry pick the sectors which we expect to perform better. By investing in particular sectors at particular time, we better our odds in the long run. Even the great investors like Peter Lynch and Warren Buffett buy things at the right price but at the right 'Time'.

Current market scenario looks quite gloomy and there is little investor interest. I think this is the right time to invest through systematic investment plans until inflation peaks off and then investing larger parts directly into the markets.

As far as the markets are concerned I expect there would be a period of weakness for some more time. But as a rule, I try to be less bearish as the markets falls and less bullish as the market rises. It leads to more objectivity. There is an old market saying - 'Intelligent investors are always running scared'

The greed is not out. Unless old money vanishes, new bull markets don't strengthen.

Sahil Kapoor
Comments are welcome.

Elliott Wave Count on Gold - III

The Elliott wave count on Gold which I updated last time is in progression now. The prices moved up swiftly to $968 in spot markets beginning another up move in the long term structural bull market. On daily charts the count on Gold is now showing an impulsive wave developing to the upside. The 3rd wave of this impulse is in progress and has reached nearly its threshold before giving a correction.

Lets look at the graph first.



The prices may touch level of $980 in the near term with crucial support now building at top of wave 1 i.e. $935.5. A smaller degree impulse is also in progression which has a target of $985. With two important fibo projections at $980-$985 markets may take a breather there. In the best case projections scenario a short term pop to $1002 is also possible.

Though the daily charts reflect an impulsive pattern developing and momentum to last upto $1000 or so, the weekly charts are quite the opposite. The weekly graph looks as if the gold prices are in a corrective wave 'B' of a higher degree flat or expanded flat correction.

The a-b-c correction which was very evident has been followed by another patten which looks like corrective and not impulsive. This may sound contrary to what I wrote on the daily charts above. However since we are into the corrective wave 'B' the smaller degree 'c' wave would be an impulse as it is in the direction of the higher degree correction. Have a look at the graph -



If we keep this graph in mind, we should be very cautious at levels of $980 to $1002 for pull backs. Though the wave '5' of the new impulse shown in the daily charts above may stretch beyond previous highs the overall picture is still corrective and not one of a new bull market in Gold.

Though the confidence in gold bulls is at a peak and I also feel that gold is in a long term bull market, but currently its not the time to be very bullish but to be cautious. Intelligent traders are always running scared.

The USD has been hammered against the Euro yet again. Euro gave a break out of the triangle pattern formed. The prices suggest that Euro might make a new high in weeks ahead but the overall momentum picture has deteriorated significantly. There is a serious lack of momentum and this would be the last leg up in Euro after which it will enter a prolong period of weakness. Euro may top out at around 1.64 against USD.

There has been huge inflow of funds into energy and precious metals index funds. Investors and investment banks were caught napping when equity markets tumbled and very few investors and traders could gain significant returns because of being too 'late' in the commodities spike.

I feel there is not much meaningful upside potential left in these two sectors and the next big bull run is evolving in base metals market. With huge energy costs and spiralling wage inflation combined with lack of resources and shortage of investments in production facilities, industrial metals may present decent returns in next few quarters.

There is some more pain left in the US housing markets but I feel the bottom is very near. At least in terms of market expectation we may see a bottom in housing in place by the third quarter of the current CY. If US housing markets bottom out, it would mark an important bottom in zinc prices as well. So keep an eye on it.


Sahil Kapoor

Metals Market Perspective

Base metal prices have behaved in a very volatile fashion. Copper prices declined nearly $800 from record highs. On domestic MCX exchange copper prices have followed an important Elliott wave pattern which is in a nascent stage. If it doesn't break Rs. 346.20 on MCX and moves past its previous high of Rs. 387 we may well begin an upward journey towards Rs. 480/Kg copper. Have a look at the copper Elliott wave.



Copper prices from a charting point of view looks set to rise to Rs. 372 in the near term. Important resistance stands at Rs. 360 and pivot support at Rs. 346. Important medium term pivot is Rs. 330 below which the bull picture can get seriously damaged. Copper may test $10000 by the end of the year if it holds $7900 for a month or so.

Copper prices looks set to conquer new highs as supply disruptions gain strength. The only hindering factor in copper prices is the inventory picture. There is little outward movement from the LME warehouses and copper prices are highly correlated to the LME inventory data.

There is an expectation of a strike in Peru in next few days. Though the wave pattern is looking strong and is signalling an uptrend, we can know whether I am right or not. At current copper price of Rs. 353 on MCX and $8200 on LME we know if copper breaks Rs. 346.2 the count would come in low probability zone and below Rs. 330.80 it would be invalidated. So we would know the precise points for exit if this trade doesn't work out. However I feel copper prices are headed to new highs in the next few weeks.


Aluminium prices have behaved in perfect Elliott wave patterns. Prices made new highs twice this week and are looking set to rise further. My previous levels of $3250 has been met and prices are now approaching the $3450 mark. The Elliott wave count on aluminium looks like this. Below is the MCX aluminium near month continues chart.



The prices are expected to target Rs. 145 and Rs. 153 in the near term. Medium to long term targets are placed to Rs. 159 and Rs. 175 for aluminium traded on local exchanges.

There was an important development where Chinese smelters have agreed to cut nearly 10% of their output. China produced 1.16mn tonnes of aluminium in May which leads to a loss of 83,000 tonnes of aluminium a month. This would create a shortfall of 1 million tonnes per annum. Though this is not a huge figure for aluminium's mammoth market size, there is another important announcement. These Chinese smelters have indicated further cuts as loss making smelters are closing down altogether. There is large amount of rationing in Chinese energy sector which would lead to further cuts in the future.

This is just the beginning of the aluminium bull story and would eventually lead to $4000 aluminium by the end of this fiscal year.

Whatever be the reason for prices to move up, wave pattern indicate the expectation early.

Market Mayhem - Is this a bottom?

In my 26th June Market Mayhem Post I wrote

. . . . . . The market is facing three important risks -

~ Inflation, INR depreciating and leading to higher prices of imported goods

~ Higher crude prices causing worsening of the fiscal deficit

~ Uncertainty about the government at the centre If investors get answers to these questions, markets would recover swiftly . . . . . . .

Market in now trying to justify its position in light of these developments. The inflation picture has been answered somewhat by the Finance ministers when he said that it can touch 13%. I still feel inflation has the capacity to go beyond that. We must remember that its just the WPI numbers that the government looks at and talks about. It is not the inflation in the hands of consumer.

RBI's policy of raising the rates too late shows how it has fallen behind the curve and is now trying to catch up with it. Indian inflation is largely driven by a mix of domestic demand and supply dynamics and international commodity prices. The important point to note that it is not only the domestic money supply is well above 21% and way above the RBI guidance of 16.5% to 17%. With this kind of influx of money into the system and such a high level of inflation the INR will depreciate to 44.20 levels in next few weeks if RBI fails to defend it.

Crude oil has formed a ending diagonal pattern right at the top and fallen $9 from the top. This has been accepted as a welcome fall by the markets and we saw a surge of 5%. Lets see the following facts.

If RBI doesn't raise rates from here in the next few weeks we have the same interest rate differential with other currencies. So can assume there wouldn't be a material rise in inflow of funds for INR.

At current inflation level there is little incentive to hold INR. Equity markets are already dow and not in a great favour globally, though some investment demand has started to kick in.

If crude prices fall and RBI is unable to defend the rupee we might have a serious problem. The rise in the equity markets would only be sentiment and wouldn't sustain.

Moreover , India has paid an average $7.7 billion a month for oil imports so far this year, compared with $5.4 billion in 2007, government data show. That widened the trade deficit to a record $10.8 billion in May.
Combining the M3 and the record deficit along with RBI's reluctance to raise rates is what is hitting the markets badly. The M3 picture is clearly suggesting the trend of inflation figures.





What does this suggest? It suggests, any interest rate hike should be greeted with open arms. INR appreciation would be another cheer for the market. But do not read too much into fall in crude oil price, it might hit back. Crude oil prices will make a difference when they fall below $120 and INR appreciates. This expectation would start getting factored into the markets but a structural bull run will not get hampered in crude oil unless it trades below $125 for a week or so.

As I wrote last time that any shake out of the present government will be healthy for the markets, the markets didn't touch the post announcement lows. In one sense the change of supporting allies will not help much but it has assuaged some worries. If the government fails to prove its majority at the centre it could mark as an important bottom for the equity markets.

Looking at the price structure of the NIFTY 50 it seems the downtrend is still the dominant trend. There is no change in the wave count though a short term bottom may get confirmed as and when Nifty closes above 4280 levels. At this closing the short term target of 3600 may looks uncertain as this is the chief risk level which will call for a large up move to 4450 and beyond. The 5th wave of corrective 'C' seems to have ended but it would take time to see whether prices confirm this assumption. From an Elliott wave perspective there is hardly anything significant to trade. There is no profitable risk reward trade unless prices resolve meaningfully.

4093 should be a strong support and should hold for prices to move past 4280. Level of 4300 will call for some shorts with small stops for traders who like to be adventurous.

Markets move in 4 different wave in general.

a) Trending and non-volatile (equity market bull run in major indices)
b) Trending and volatile (recent 2008 crude oil spike)
c) Sideways and volatile (post corrective moves)
d) Sideways and non-volatile (low participation, generally bottom of a stock market index)

Indian stock market indices have come off from category a to b( correction) and now to C. So we might assume d to be witnessed unless we see a sharp turn to category a. There is lot of greed left in investors which might end with another strong downward push, but a possibility of sharp up move before that cannot be ruled out.

Financial advisor are witnessing good amount of inflow into mutual funds for investment as markets have touched the 400 mark. This hardly calls for a bottom. Tough crowds are always right, but they are wrong only at the point of reversal. So it is better to play the wait and watch game before plunging into the markets with all your stash.


The important point to note here is that markets may greet interest rate hikes with joy rather than gloom. Rationally any attempt to bring down the inflation problem is good for stocks. With call money markets now quoting 9% and above INR may see respite from depreciation and help stocks recover. A fall in the government at centre might be greeted positively. However any free will shown by the government in policy making would be an important development.

However markets may still recover due to these changes but the damage that has been caused due to high prices of resource commodities is deepening everyday unless these commodities cool off. We might enter a lean patch before the next big bull run commences. According to Elliott wave pattern we might have formed just the wave 'A' of the correction and might fall more in the next one year or so. But this is just another assumption and will take time to resolve.

The sectors which can give huge returns from current levels looks attractive. IT, pipes, FMCG and energy would do well. These are the sectors which to well in the end of a huge bull run and beginning of a new bull run. We might bet money on one of the two.


Due to a problem with hardware of my PC I couldn't publish graphs of the Elliott Wave counts. Graphs will be published in a week or so.

sahil kapoor
Comments are welcome.

Metals Market Perspective

The Elliott wave count on Gold that was giving a signal of downward push to the prices has been invalidated rather convincingly. The alternate count that I mentioned in my first post has picked up strength.

As of now we have exited the corrective trend channel for gold and moved out of the bearish price pattern formation. So the markets didn't spend enough time in the fourth corrective wave to mark it as an important correction. The 2nd wave of the current impulse was of nearly 19 months and the expected 4th wave zig-zag didn't last that long. Still it is premature to say that the overall structure has changed and we have entered the first upmove of the 5th impulse. It does seem that Gold became a good risk reward weighted buy after crossing $910. But the kind of exposure one can take on this volatile market needs to be debated. Gold prices would now target $960 and $980 in the next few weeks. Important price reversal point is $910.

On the Elliott wave count we have entered an impulsive lower degree 3rd wave which is projecting targets of $960 in the near term. i would update the graph on Elliott wave count on gold.

Crude oil has been rising ever since it pierced the $139 mark. Now it has already achieved the $145. Crude oil seems targeting $149 in the short term and $155 may be a medium term top. Although calling a top in the markets is fruitless exercise, still I would suggest a top of around $155 to hold in the medium term.

Copper has made a new life time high. I wrote in my previous Metals Market Perspective and the Market update posts that copper is ready to blast off the blocks. Now it seems Copper will aim for $10000 by the end of this year if it is able to clear the overhead supply till $9080. Copper has been better to trade in India as the INR depreciation has favoured the price upmove. Copper traded on the Indian commodity Exchanges has made new high in every session in the last one week. The strength seems to have furious momentum. Copper can be the next big bull in the making.

Aluminium has broken out of its $3170 resistance. The market has buying momentum. Yesterday the prices recovered $100 from days low on LME. I feel aluminium has the strength to make a new all time high in the next few weeks. The immediate target for aluminium now stands at $3250.

I would put up on article Dynamics of 'The Oil Price' in few days.

Market Mayhem - Whats Next?

Investor sentiment has hit a new low. Markets slided like a falling knife in the last 10 days. As I wrote earlier as and when markets closed below 4155 it was time to sell into any strength. Below 4155, 3800 seemed imminent.

Yesterday Nifty 50, the stock market index of NSE, touched a significant low. The markets might just have made another important low. This is the point where valuations in the stocks would look good to an investors. The broader market has fallen even harder.



The banking stocks have been beaten down to very poor valuations along with real estate sector and the metals sector. The sector which looks vulnerable now is the infrastructure sector.

However there is lot of value in the markets which is emerging now for long term investors. Traders who want to time it might wait further to see a convincingly bullish price pattern. However the up move might just be a pull back rather than an up move. With inflation touching 11.4% last week and expected to touch 14% in next three weeks there is little hope for the investors as of now. The incessant depreciation of rupee is making matter worse as it is unleashing the furry of the oil price on the country's financial health or should I say financial mess.

The equity markets the world over has entered a bearish phase. The only flash in the pan would be a significant USD recovery which would bring down the commodity prices and increase the likelihood of inflation getting milder.

The Elliott wave pattern in the markets gives us an idea that a major round of weakness in the market got over yesterday. The markets have touched the fifth and third wave equality of the wave 5 of the larger 'C' wave to the downside.



Looking at the current picture the markets tells me that a major bottom will be formed at 3600 to 3650 levels in the next week or so if we close negative today. As I wrote previously 3800 seems a strong support but yesterday's low gives an idea that we might be heading lower.

In the very short term I feel a strong bounce or counter trend rally seems important. Nifty is deeply oversold right now and calls for a meaningful bounce. The overhead resistance stands tall at 4125 levels.

Looking at the macro theme,the inflation expectation in the economy seems to be getting worse. The interest rates are looking up and there would be further rise in the cost of money to an extent of 150 basis points. There is little that can be done by the way of monetary policy in the short term. The INR move yesterday was suggestive of an expected weakening of the government at the centre and probably its fall in the next few days. July 7 would be a very crucial day for markets as this is an important cyclical time zone and an event risk lies there. If the government at the centre falls, it would not be a bearish sign. it would be a bullish one as market would take a sigh of relief from the incapacity of the present set of policy decisions.

As for traders this markets is not fit for trading on an intraday basis for this week at least. It would be wise to sell countertrend up move to 4125 or 4093. The important resistance stands at 4280. In the larger trend wave pattern it seems we may be in for a prolong period of weakness if we go above 4670 in July. As this would cause the markets to make corrective flat pattern which may take markets up to previous high and then back to sub 4000 levels before moving on to another bull trend. So it is important that Nifty remains in the downtrend till the end of this year to early next year as we may see a bull trend emerge out of it.

Important to watch any major reversal patterns on a 240 minutes graph and more importantly on a daily basis. We have entered 5 straight week of losses in nifty and last three days seeing a fall for more than 10%. Its time to be alert for a snap back for traders who are short.