Markets getting back to normal??

Gold prices are now rising relative to every currency and commodity. Gold is expensive in terms of energy, metals and other major currency. With the last elliott wave count in gold giving out the possibility that gold prices are entering a period of weakness and may test $700. However, in the short term it has completed a corrective pattern and is set to rise. I would update the count itself in the next post.

Now it looks like the money that has been thrown into the world markets by all central banks is doing a great good to the commodity markets. All currencies are falling relative to commodity markets especially the metals and precious metals indices. This is good news for the central bankers. The bad news is that stock markets are losing steam and some technical studies are turning bearish. But they have not given a clear sell as yet. Take a look at the following graphs -

Gold
Gold prices have come out of a strong flag pattern. The price study shows strong rise in volatility and with the trend up we can see gold benefiting strongly to the upside if stocks break down. With USD weakening, gold is getting the benefit.

S&P 500

Time and again I have seen seeming double top turn to double bottom. So wait for SPX to break below 875 to confirm a sell. But be cautious. Bands are signalling a sell.

Various other indices have given strong divergence. One important case in point is the US homebuilders ETF. It is forming a H&S on the neckline of an inverted H&S which will give an above average move is it breaks down.

XHB - Homebuilders ETF

Various risk gauge are turning positive. In the last one year there has been a serious discrepancy in the movement of certain markets in relation to the other. The USD and gold were moving in tandem, bond and stocks very moving opposite, USD and stocks were moving in opposite direction. These long term correlations were exact inverse of what they are in a normal market scenario. This was primarily due to the deflation expectation in the market. See this article from Marketwatch

A number of indicators are now showing that markets are getting out of this expectation and deflation expectation is actually abating. Certain markets like gold, metals and energy have started pricing in some inflationary expectation. This sounds very comforting but with rising unemployment and thawed consumer debt market, this could well turn out to be another nightmare.

The scenario that can now playout is a strong rally in commodities can lead to a rise in inflation. If this is combined with some money into the hands of consumer it could well buy some more time for debt implosion. Still its a mess that Central bankers have chosen to get into. If this fails then deflation spiral would be deep and would take years to go away. Markets are signalling some expectation of things improving but a reversal in stock prices would be the key to watch.

It is quite dramatic to observe the socio economic patterns as they turn out. The latest rally in stocks is actually helping companies to raise money, debt. It is not the other way round. So if stock prices fall again it would be just the test that is required to gauge the strength of economic improvement being witnessed. Bull markets don't emerge when we do less badly, they emerge when we can't do anything.

May would be interesting.

Comments are welcome.

Market Mayhem - Index explodes

S&P CNX Nifty closed 17% up after the congress came to power again at the centre. It was largely an unexpected result. Especially for me as it defied the trend in other countries which voted out the incumbent governments due to terrorism and financial meltdown. However the verdict created euphoria seen never before and has thrown open the door for our markets to remain the best performing market for the next few years.

The elliott wave count now looks a bit easy to interpret as the rule violation of 3 being the shortest is over. We clearly saw an extension in the third wave and now are in wave 5 of the higher degree wave 1. This means we are about to end the first impulse of the next big bull run. I have been writing this again and again that this is the last leg of uptrend. But it has stretched beyond expectation and it would be wise to wait for it to turn. Meanwhile CNX IT index has formed a definitive reversal signal and looks set to lead on the way down.

The latest elliott wave count on S&P CNX Nifty looks like this -



Your comments and analysis is welcome.

World Market Analysis

World Market Analysis

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Mometum Divergence

Nifty is witnessing strong divergence on various momentum oscillator. Yesterday Nifty formed an outside day which was preceded by a Doji Star pattern. These combination pattern signals exhaustion of the current move and combined with heavy divergence it would limit upside in the index.



This suggest long positions should either be exited or trailed. Selling pressure would be intensified below 3500.

Swift trade update!!

Last week I wrote that market may correct to lower levels. It proved dead wrong as markets regained strength. I have been counting the advance in five waves and last two weeks price range was looking like more of distribution in wave 'b'. However I have to revise the count to the wave 5 in progress of a higher degree wave (I) of a new bull market. A correction may take place once wave 5 exhausts. See the following graph -



In the above graph -

Wave 1 = 2539 to 3103 equals 564 points

Wave 3 = 2962 to 3511 equals 549 points

Wave 5 = 3309 to 3664 equals 355 points till now, may be its the high!!

Now wave 5 cannot be larger than 550 points as it will make wave 3 the shortest and negate the entire 5 upmove count of being a five wave upward impulse. So it looks clear that whatever is the extent of rise Nifty should remain capped at 3844. If it breaks that level too than the whole move becomes corrective. Overall the structure looks healthy and topish. Wave 1 will end with a surprise, overnight. Time projections still have room till mid of may. But Looks like a clear case of being very cautious with mid caps and some large caps.

A Swift Trade!!!

S&P CNX Nifty looks like a nice sell here. See the following graph -

Momentum oscillators have broken down and market will give a highly bearish close if it closes below 3280 to complete a double top pattern. Looks like we are heading to 3100 and possibly 2900. Risk is a new high above 3525.

The fallacy of oneness!!!

Market correlations sometimes become so strong that it is difficult to believe that they will cease to exist one day. From the 1st day of my watching the quote screen there has been news. I have seen news being bombarded on everyone from financial journalist some of whom have never seen a trading platform. They report that Market 'A' closed down or up due to Market 'B'. This is nonsensical to say the least.

As a student of intermarket analysis, it is difficult for me the explain the fallacy of correlation. To be a student of the markets one has to be a student of psychology. Mass psychology is difficult to analyse as it involves many individual. It is always dual in nature. False in its projection and true in its action. We are unable to respect the individuality of each market participant as a decision maker and the combined decision of the market as a whole. This dual relationship leads to the dispersion in prices. Think of prices as thoughts. Most individuals have their own thoughts, some use others' and yet someone have none. Or some market participants dictate prices, some use this dictation and yet some others use the product. From my own experience, I think there are just one in hundred individual who 'wants' to dictate the price. The one who has his own price. It can be right of wrong, low or high. But there is a price, which the market has to accept as an input. Out of this 1 percent there are some individuals who are able to convey the correct price to the market, through their actions. The force of action in the markets being the application of money.

Duality, leads us to perfection. But perfection will lead us to death. Market participants generally follow the direction of being 'guided by the price'. Ironically the tag line of this blog is the same - 'An unbiased view of the markets guided by prices'. Unbiased changes it all. Nonetheless, market participants are trying to get towards the third category of participants. Those who have no thoughts or to say prices of their own. They just take what is given to them. Most of the technical analyst and fundamental analyst fall in this category. They take the historical data of prices or any other parameter and practice a closed vision. Their trading methods become like a auto pilot with no 'sense' of the future but all the inventory of the past.

What is necessary is to move towards the progressive market participants. I call them the alpha. They are the beginning to the deep wealth that can be explored inside the daily pandemonium of financial markets. Alpha would always have the inventory and would know exactly what it tells. It would be ready to share and analyse(give and take) other's inventory of prices(thoughts). But the only difference it has from the other two forms that it would have its own prices.

I was curious to find out that whether current market conditions are as chaotic as they were in the last or the crisis before that. I realized that conditions are less chaotic today. History tells us that the current pace of economic degrowth is one of the worst, if not worst. Even the economic indicators are worse than they were in the most other recession or economic crisis. The public reaction to the events have not been same though. Human beings grow and evolve. People have evolved, they understand that economic growth and degrowth are part of the story, like joy and sorrow. These are the laws of nature so to say. But again as human progress is one phenomenon which is against the law, the change or progress in the market participants sentiment is too against the law of the nature. Market participants have grown. Today we may have very few people who belong to the third category I called the alpha, but they are very large in number than they were. I know this to be true. If it were to be any other way, we would have been at the same economic stand point as we were before alpha started rising.

I have mentioned this concept of rising ticks in financial markets. What it means is that with every passing day, there are more and more financial instruments being traded and added. This leads to a rise in number of ticks traded. Each individual in its own capacity trade more frequently than before. This has been possible due to decrease it transaction costs, increase in technology and a general progressive nature towards the understanding of the financial markets. I have been a critical of this rise. But now I believe this is the one of the few things that has added or raised the bar for rationality in financial markets. Though the concept is again dual in nature, that it involves an increase in lesser degree irrationality and a decrease in higher degree rationality. With a rise in higher degree rationality, meaning long term correctness of the prices the progressive nature of participants is realized. If market participants are evolving and are becoming more efficient than what is giving 'in'. There has to be something which has to given in. Again progress is the eddy. It cannot the explained. What just rises in the entropy. This doesn't mean that markets are progressing towards death, they are actually progressing towards being in a conscious state of correctness and still being away from it. 'The duality'.

Needless to say that my writing and communication skills are inferior to convey exactly what I believe. I still feel market participants who understands this duality would know. And a closing thought is to still know that life and death is a constant occurrence. It is not applicable more anywhere than the financial markets. We evolve every time we perish.

Market Mayhem - The Big spike

Last time I wrote that prices are signalling an end to the bear market. I was rather interested in finding out whether the previous bear markets ended in the same manner that we witnssed this time. WIthout much delay, take a look at the following graph. It is very similar to the graph made by dshort.com. Actually I was interested in making one for the sensex.

Sensex - The Four Bear Markets

There is a compelling evidence that the last bear market of 2000 is similar to the current move. The bottoming out process is quite similar and the subsequent rally is also significant.

Coming to the Elliott wave analysis, we are forming the wave '1' of a larger degree impulsive wave to the upside. The current move suggest that the wave '1' is in the final stages of formation and may end near the levels of 3500 - 3600. The subsequent wave '2' would be a zig-zag and would be deep.

Market Mayhem - The last breakdown !!

In previous posts I had mentioned the probability that markets were triangulating in the fourth wave of the wave 'c' decline. The S&P CNX Nifty has given a breakdown out of that range and is now set to conquer new lows. The wave 'e' of the triangle ended abruptly at the mentioned level of 2960. See previous post -

Current possibility has been thoroughly highlighted in my internal posts that market is forming a triangle which may take some more time to form. The graph below shows the current count on a one hour graph. It shows that current move is again corrective and in threes. 50 period EMA has kept price capped and the formation of 'e' in the triangle may end at 50 EMA which is currently at 2960

The triangle breakdown gives a measured move target of around 1900 levels. However from a market extension point of view there seems a likely hood that we may form a low at around 2079 - 2034 range.

The current breakdown in the market seems sharp and the index may decline strongly after testing the triangulation and giving us the point of recognition. Take a look at the graph for the current wave structure -



The current downleg in the market is largely driven by the fall in banking stocks. However stock market bottom and reversal are not congruent with a falling financial sector. This means that there is some more time left for India stock markets to reverse. The initial signals of reversal may come from an out performance in the financial sector stocks. Since we have entered the wave '5' of the down leg, there would be a lot of divergence on the momentum oscillator. The weekly structure is still trapped inside the corrective price channel. Take a look -



Indian markets might face strong selling pressure due to intense INR weakness. In the short term expect markets to take support at 2572 and 2490 levels. 2750 to 2770 remains a strong resistance range and would see a lot of selling in the market.

Market Mayhem - Triangle formation

The S&P CNX Nifty corrective pattern of the fourth wave which was expectedly forming a triangle is now in mature stage of formation. In the last update I had called for a 1000 point rally from lows of 2500 and market retraced the advance from 3147.

Current possibility has been throughly highlighted in my internal posts that market is forming a triangle which may take some more time to form. The graph below shows the current count on a one hour graph. It shows that current move is again corrective and in threes. 50 period EMA has kept price capped and the formation of 'e' in the triangle may end at 50 EMA which is currently at 2960.







Weekly channel is holding strong for the time being and looks to hold the price in it.



Point and figure graph shows strong support at 2489 which can lead completion of wave 'd'.



Momentum studies are weak and TRIX is also breaking down pointing towards further downside in days to come.




Look for prices to give a rebound to complete triangle by forming 'E' at around 2950.

2009 - Year of expectations!!!

Happy New Year to everyone. 31st December '08 gave me a feeling that finally the year is coming to an end. 2008 has been the worst year in living memory of most people. Some might argue that things can't get worse than this, but there is lot that has to be seen before we come to any conclusion. Lets just see what was good about 2008 -

• India did relatively well in Olympics 2008. We saw some new heroes emerging.
• Indian sports in general was very good. Golf, badminton, cricket and football had a very good year.
• Central government survived a confidence test vote
• nuclear deal - (long term impacts still in question)
• Launched Chandrayaan-1 from Satish Dhawan Space Centre, Sriharikota

and some other that I might have missed.

what did an average defensive investor gain in 2008?

• Stocks became cheap (after eroding much of the gains seen in the last three years)
• High rates on FD for long term investments, still available
• Better home prices

There were some unprecedented and mind numbing incidents that happened in 2008 which took everyone by surprise. Worst was the attacks in mumbai. Blasts in various Indian cities and many stampede which caused huge loss of human life.

In every sense the year gone by has been quite a shocker to most of the financial gurus and practitioners too. No one in the world ever imagined that oil would fall more than 80% from its peak in 5 straight months. Stock markets recoupled after failing to decouple and created a panic amongst investors.

Lets put things into perspective as the stand today. I would look at financial markets as this blog is about the markets.

First of all there has been some serious breakdown in intermarket correlations. In the last one year stocks and bond prices has moved in opposite direction. (Generally rising bond prices indicate lower borrowing costs and a positively sloping yield curves' presence leads to a rally in stocks, so bonds and stocks are positively correlated). Bond prices across the world first fell remarkably and then started to climb incessantly. Meanwhile stocks remained resilient initially and then sold off as bond prices started rising. So a serious correlation was interrupted.

Secondly, bonds and commodities showed a clear correlation as commodities fell and bond prices started rising. There was a one month lag in bond prices in some countries like India, which is good.

The US dollar gained 17% in last quarter or so. This lead to a fall in commodities which is also a perfect correlation. But a rising USD is in general good for stocks which didn't happen in 2008.

To summarize the correlations -

1. Stocks are bond prices are positively correlated, bond prices (note: bond prices and not bond yields are mentioned here) lead stocks in both bear and bull markets.
2. Bond prices and commodity prices are negatively correlated, commodities lead bond prices by a small margin.
3. USD is inversely correlated to commodities, its leading characteristics have not been very strong.
4. A rising USD is good for US stocks, but not essentially for other markets like emerging markets in general (domestic currency strength is actually good for other markets barring few exceptions like China).

Now this creates a question that why then stocks didn't rally as borrowing costs came down. The answer is the deflation expectation. Markets have been frightened by the expectation that price level would eventually fall so much that prices of goods and services would start falling year on year atleast for a few months. This was very evident from a number of factors. There was massive risk aversion in 2008 as bond price rally lead to yield going to zero for US3 month Treasury. The yields on High Yields (Junk Bonds) started rising and some were quoting a yield as high as 56%. There was a massive sell-off in consumption commodities like copper, platinum and agricultural commodities due to a severe fall in employment.

So what do we 'Expect in 2009' ?

All previous financial crisis like 1907, 1929, 1930, 1970 lead to severe legislation's in US. Like 1907 led to the creation of Federal Reserve, 1929 lead to SEC, 1970 lead to another set of regulations for funds. In India previous market sell-off has led to more regulations like crisis of 1992 lead to the creation of SEBI, then the scrapping of badla system, depositories etc. So its very important to be prepared to for regulations and see how the markets react to them.

Second is to judge whether the worse is behind us.

The US economy is weak and will remain weak for some more time. Unemployment in US would rise to levels of 8% or more, some more banks may fail. Currently following banks have failed. Click here for list of failed banks.

Imports in the US would remain low and western demand would remain sluggish. Some sectors like auto, housing and retail would suffer further damage due to a fall in demand. All these factors are well known now and markets have priced in most of the bad news already. As I wrote previously that reversal signs have started to emerge and we has quite a rise in the world equity markets post November. In fact Indian equity markets are also showing signs of resilience as Nifty is already up around 600 points from where a 1000 point rally was expected. See previous commentary.

The current market scenario shows that markets are indeed rising with some backing of improvement in market sentiment, flows in the credit market and a rising expectation of economic growth. One of the most important indicator that should tracked now is the long term bond prices. Since markets have started pricing in deflationary pressure than a fall in the long term bond prices will lead to weakening of the sentiment and reduced 'Panic Selling'.

2009 is the time to raise your equity weight age and reduce your holdings of bonds and debts. India FD rates are still attractive. However in bear markets there are several events that can create massive buying opportunities. One recent example is Satyam. So every major opportunity should be used to buy sound companies with 10 years of more of stable earnings and a PE of less than 15. Any event that leads to a sudden dip the stock prices of firms which are strong from a business point of view should be bought and kept for few years.

A few caveats - 2009 will bring opportunites but with large risks attached to them, so be ready to evaluate the risks before taking a punt. Inflation may rise again as commodities make an interim come back, stocks might see a final bottom in place in the US along with a relief rally in commodities. Indian markets are better placed in terms of financial health but worse of in terms of investment flows, geo-politics and the stability of the government.

In 2009

Expect cheaper goods, eating joints which increased the prices of food and edible items during last year inflation has not decreased the rates yet. This can happen in few months. Cheaper travelling, better media entertainment and better security might make your weekends.

Happy New Year

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.

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.

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.

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.

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

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.