Tuesday, July 26, 2011

EOD Analysis for 26th July 2011 and Outlook for 27th July 2011

The volumes today were actually lower than those of yesterday and the Nifty futures OI stood at 23.5 million to 24 million throughout the day; this indicates lack of retail or mid-level traders participating in the market and is not surprising considering that we are just 2 days away from expiry. As with all markets, Banknifty had gone up significantly yesterday prior to the RBI rate hike announcement. 25 bps was factored by the markets as per a lot of experts and I would tend to agree with that. However, based on the price and volume action on Banknifty through out the month, it was evident that there would be no fireworks on Banknifty as most of the positive news (if it did come out) was discounted already and probably we would have seen an attempt to take out 11500 once

Since it was 2 consecutive closes above 5608, it had to break today or if it had held, it would do so until Thursday for 5 consecutive days. However, there are shorts pending to be covered and the short-covering itself will provide a minimum upside of 40-50 points.

50 bps rate hike was a dampener for the markets and Banknifty came dangerously close to breaching 11050 levels today but most shorts covered in that zone and brought Banknifty back to respectable levels. On a fundamental level, these signs are healthy for the markets. The commodity markets are rallying and with monsoon data still awaited, RBI would certainly prefer to pre-empt inflation by hiking interest rates [that economically, the rate hikes have no effect in taming inflation is a separate issue] If we look at the rate hikes in the last 8 instances, every time we had a rate hike of 50 bps, Banknifty used to go all the way back to 10500-10750 levels

For the last 2 instances of 50 bps rate hike [which makes it 100 bps hike overall], Banknifty has fallen but falls have been arrested within the 11000-11050 zone; this is a very healthy sign for the markets; it shows underlying strength of banks and the fact that smart money is slowly moving in. The monsoon session IMHO will usher good cheer to the Indian economy contrary to what a lot of people are expecting. It is sad to see that a lot people in the light of trading are missing the broader picture of the markets. Unless we have some catastrophes  Nifty is on its way to go higher and such corrections are healthy. Banknifty, LnT and Reliance hold the key to take Nifty higher.

For July expiry the targets still remain in the 5600-5690 zone and then we can expect a retest of 5480-5532 levels and most falls would be ideally arrested in these zone failing which we may retest the 5408-5440 zone once. To the extent 5408 holds on EOD basis, there should be no panic and dips in these regions must be used to buy Nifty for trading or for short term boosts via ETFs; this rate hike that has come about today will bring some more weakness in rate sensitive stocks like automotive and real estate apart from banks. Some counters are available at extremely good valuations and can be very profitable with a 3 month to 6 month horizon.

Levels Remain Unchanged
For the Downside: 5408; 5440; 5480; 5532
For the Upside: 5580; 5655; 5690

Bulls can only rejoice after 2 consecutive closes above 5740 following which Nifty will open for a retest of 5890-5944 levels;

Bears can only rejoice after 5532 is broken on the downside on EOD basis since that will open Nifty for retest of 5408-5440 [close below 5532 implies that the 5480-5532 zone did not provide the required support]

The key dates for August have already been posted and the volumes for upside have been posted last week.
Expected price actions will be posted after July Expiry

A Small note on Market Geometry
There is a simple market geometry with extreme swings on the upside or downside; Once a Swing Top and Swing Bottom are established, it retraces 50% of the move before taking any direction further. There was a relentless drive up from June 20th low of 5196 to July 8th top of 5740; So the rise of 544 points would retrace 272 points in about 27 days with the current Rate of Change of Nifty @ 10 points per day approximately giving a price target of 5740 - 272 = 5468 in about 27 days from 8th July i.e. 4th August 2011; perfectly in line with the levels indicated earlier.

No comments: