Saturday, September 13, 2008

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

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