Wednesday, July 16, 2008

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

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