Wednesday, July 02, 2008

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.

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