EOD Analysis for 5th August 2011 and Outlook for 8th August 2011

With weak global cues and margin calls for FIIs on the US bourses, it was pretty obvious that a sell-off would be triggered today. What is remarkable about today is the way Nifty managed to claw back from the lows of the day. The volumes were on the higher side today for the sell-off and Nifty did go well below the Feb 11^th bottom of 5177 before turning around. Banknifty went well below its critical support of 10400 as well and this is not at all a healthy sign for the moment. Short-covering was also very limited so one should wait for Banknifty to slowly claw back to 10600 levels before taking fresh positions on the counter.

For Nifty, the only solace is that we got a close above 5200 though a close above 5225 would have been ideal. Safe to assume that the upside for remainder of 2011 is capped at 5944; the only conditions that would change this outlook is a close above 5944 within 17^th October 2011 [give or take a couple of days for the same]. Range for next week remains '5092-5348 and the corresponding levels for the same are as follows

For The Upside: 5225; 5280; 5320; 5348; 5378; 5408

For The Downside: 5177; 5140; 5125; 5092 (Last hope for any meaningful upside)

Expiry target for the current month stands above 5408 as of now and Buy on Dips recommended for Nifty futures. One should limit exposure to IT pack right now as the macro-economic situation does not warrant too much upside in these counters. Banks will lead the upside.

This is the 3^rd consecutive close below 5408 and this will continue until Tuesday or worse to the end of next week as well. [Based on the range I have given above] There are gap-downs that have been created and these should be filled in the week after Independence Day. Options premium will rapidly decrease and it is best to hedge positions by writing an option.

'5125-5225 this entire band is a buy zone and one can hedge the risk by writing a Call Option of 51/52 strike. 

The extreme Stop Loss points are:

For the Long Nifty position is 5065 on Spot / For Short CE 5280 Spot

[Short Positions if created should be hedged with Short ATM PE with the same levels as provided above and guidelines below]

Depending on which level one enters the position, please check the Upside and Downside levels and decide accordingly; close the losing position and continue with the winning position for a net gain of 30 to 40 points.

There is an element of panic at the moment and whilst the upside is limited, we are still looking at an upside of 700-800 points in a 3 to 4 month time-frame from here. Avoid leverage and buy banking counters on delivery basis and likewise for speciality pharmaceuticals. The risk reward ratio is very much in favor of long positions now and are wonderful portfolio churning opportunities.

Should one have lesser capital, one can buy index ETFs and thematic ETFs or increase exposure to good equity funds like Banking, HDFC Top 200. For midcaps and smallcaps, one is better off investing directly in counters and retaining them in the DP account. Keep booking profits regularly as 4800 levels are a certainty but as of now, I see that happening only in 2012. This is the time for bottom fishing for a short-term upside.

From Diwali to Christmas period, one should look at the conditions of the market and start withdrawing completely even old positions even if they are badgered. If we do not tide over 5944 by 17th October, it is curtains for bulls for a pretty long time.

One should rather hold on to cash and wait for the bottoms to come Nifty is all set for 4850-4600-4350 in 2012 and first half of 2013; this is when cash should be deployed in tranches and long term investments must be made for a 2 year target of at least 40% upside CAGR.

Thanks for visiting my blog and encouraging me to contribute to your trading plans. I hope most of you had at least a week of minimal losses if not profits. Forget the panic created by the media. As of now, the growth story for India is intact [albeit a slightly muted one unlike my outlook even a week earlier] But let us not forget that 700 points from here in a 3 to 4 month time-frame still implies a 14% yield on the index! Enjoy your weekend and keep looking out for charts and time-frames that will be updated from time to time.

EOD Analysis for 4th August 2011 and Outlook for 5th August 2011

Nifty opened with reasonable volumes and the morning session saw Nifty futures clocking an OI of about 24 million but then after a few gyrations within a narrow trading range, the OI went to almost 25 million after Europe opened. A lot of short-covering was seen in Banknifty in the morning and at one stage it went to the crucial level of 10750 where more supply was expected but there was a short build-up over there once again and all gains were more than reversed. One can expect this to continue tomorrow as well and a turnaround to take place on Monday.

The broad range still remains 5408-5532 for August series with an occasional throw-over or throw-under. Once the monsoon session is done with in parliament and the global cues get clearer, we can start seeing some upsides after August expiry. The outlook remains unchanged as of now.

As mentioned yesterday, 1 close below 5408 would open Nifty for a retest of 5348-5280 zone. The moment 5380 levels were breached on the downside, another million of OI was added onto Nifty futures, accelerating the fall. Now we have 2 consecutive closes below 5408 and if the carnage is not arrested within 5280 levels, we could go all the way down to 5225-5177 unless Monday provides the trend reversal as expected. This is the 3rd consecutive day of fall on Nifty and 5th straight losing session from 30th July.

If we go below 5177, then the last hope for bulls will be 5092 for any meaningful upside. Today, Nifty completed a 34 day Fibo cycle from the June 20th low of 5196 in terms of trading days [sometimes the weakness extends to a day or so]

For August Series, the expiry target stands at 5480-5532 as of now with 1 possible visit to 5580 and 1 possible visit to 5280 [2 consecutive closes below 5408 can take this to 5225 levels as well].

The options data though noisy actually shows the amount of fuel added to the fire at the moment

Highest OI in 5600 CE at about 8 million and 5500 CE at 7 million. On the Puts side 5400 PE has 6.6 million OI and 5500 PE has 4.6 million OI. With all heavy weights badly badgered, one should not read too much into these options figures. IMHO, all that this is showing is that a lot of retail traders have not factored for the lesser number of trading sessions for current expiry and are buying options which option writers are happily obliging them with.

Just to get things in perspective, the 5400/5500/5600 CEs have no intrinsic value at the moment but are going for time values of 80s, 40s and 20s which is ridiculous. 5300 / 5200 PEs have 0 intrinsic values but quoting high time values again.....the sooner retail traders understand this part for August series, the better.

However, the August 5700 PE quotes are going at par with 0 time value and 5600 PE quotes are going at about a 20 point premium in the first week of the series itself! That is giving some hope of an upside to come towards the end of the third week of August

As of now, 5280-5348-5408 levels are Buy Levels for Nifty futures with targets 5440-5480
5500-5532 levels are Sell Levels for Nifty futures with targets 5440-5408

One should only use options to hedge these positions and use appropriate stop losses. For current series, a better way to hedge the position in futures is to write an option in the same direction and milk options premium. As it is, time value will erode faster in current series and there will be some flat sessions as well to rationalize this spikes up and spikes down to balance the ROC to 10 points per day.

Master Time-Price Charts 2011 With 2 Significant Pivots

As a tribute to the valuable support all of you have been providing to this blog, today, I would like to share with you 2 master time-price charts which have been refined from the earlier charts with 2 pivot dates

Chart1 Please click the Chart1 Link on the left to access the first file

Chart 1 takes the 5th November 2010 high of 6338 as the pivot high and plots the subsequent time and price actions till date

Chart2 Please click the Chart2 Link on the left to access the second file

Chart2 takes the 11th Feb 2011 low of 5177 as the pivot low and subsequent time and price actions till date

With these 2 charts as reference, all the vertical, horizontal and diagonal dates highlighted in colors mark crucial turning points for Nifty and thus give you an idea to be alert for subsequent swings either ways and take trading positions accordingly. You can see the time and price actions already covered and gauge the significance of this chart.

I sincerely hope that these charts help the followers of the blog in a positive way for trading and investing.

EOD Analysis for 3rd August 2011 and Outlook for 4th August 2011

The volumes were relatively higher compared to yesterday but way behind the July expiry volumes. Nifty Futures OI stood at 22 million in the morning but surged to 24.5 million after Europe opened. Banknifty had a pending retest of 10600-660 levels and at one point of time went below 10600 as well. Banknifty is precariously placed at 10600-660 levels now but with weak global cues, it may spend some time in the 10500-10650 zone before moving upwards. Even the heavy weights were badgered and hence the prolonged downward moves.

As mentioned yesterday as well, 3rd August was a crucial turning point for Nifty and retrogade mercury fuelled the down move further from an astrological perspective. Now the next turning point will come on Monday or Tuesday and some moves to the upside can be expected. 3rd August also completes the Fibo cyle of 377 days with the 5th Feb 10 bottom of sub-4700 levels [almost 4600 levels at one point of the day]
4th August marks the Fibo cycle of 34 days from the 20th June 11 low of 5196. If this short term cycle is extrapolated to the 49 day cycle, we should be testing 5280 levels within 26th August 11 before marching upwards to meaningful levels.

The broad range still remains 5408-5532 with an occasional throw-over or throw-under. These dips are good opportunities to buy Nifty to the extent we do not fall below 5177 in August series. Weakness will continue until 26th August and then some upsides will follow.

Conditions remain unchanged
1 close below 5408 and we open for 5348-5280 levels
2 closes below 5408 and we open for 5225-5177-5092 (Last hope for any meaningful upside)
If we go below 5177, the upside for Nifty will be capped at 5944 for rest of 2011.

Banknifty having tested the lows should start pulling back now and a lot of the upside for Nifty will be determined by Banknifty but I expect this to come in only from Monday.

Crucial Levels remain unchanged
For the Downside: 5408;5440;5480 [below 5408, I have given the conditions above]
For the Upside: 5532;5580;5608;5655;5690

For Banknifty
10600-10750-11000 remain Support and Resistance Levels

Banking counters like HDFC, HDFC Bank, IFCI, JM Financial, Navneet Publications, BHEL, LnT, Tata Motors, Mahindra and Mahindra are all at attractive valuations and one can buy them in a staggered format on delivery basis. On the pharmaceutical side, Lupin, DRL, Cadilla, Biocon, Sun Pharma, Cipla etc are all very attractive counters and one should look at opportunities to buy them during the low and gloomy period of August series for a short term bounce of 15% to 18% [3 months to 6 months time frame]

Today, I will be uploading 2 charts in the same manner as I gave the Master Time sheet earlier; 1 chart has been made with the pivot date of 5th November 2010 with high and the other has been made with the swing low made on 11th Feb 11 low of 5177; both these charts will provide useful turning points for the remainder of 2011

EOD Analysis for 2nd August 2011 and Outlook for 3rd August 2011

With weak global cues, lower volumes and lack of conviction to cross over the 5532 barrier helped the downside to be rapid and furious in the initial part of trade itself. For the first couple of weeks, this is what one can expect on Nifty. Gyrations in the 5408-5532 zone unless some major upside or downside triggers come in.

Banknifty fell a lot today following its global counter-parts. The retest of 10660 is pending but 10700-10750 level provided the interim support today.

With low volumes, it is a bit difficult to interpret the level of short-covering that has been done already but there are quite a few shorts in the system for sure. I expect Nifty to visit the crucial support zone of 5408 Friday and as of now, seems like we will bounce back from this level. The litmus test for Nifty is to maintain 5408 on EOD basis until 10th August.

The crucial levels remain the same
For Downside: 5408;5440;5480
For Upside: 5532;5580;5608;5655;5690

1 close below 5408 and we open for 5348-5280; 2 consecutive closes below 5408 and the carnage can go down all the way to 5225-5177. To the extent we don't go below 5177, the last rally has its chances to come up. Below 5177, 5092 is the last hope for bulls to generate any upside but that upside is in all likelihood capped at 5944 levels.

This month has lesser number of trading days compared to June or July; hence one should be very careful with options strategies on the Long side as the time value will rapidly decrease. The OI for both 5400 PE and 5500 CE are highest at about 6.5 million. The risk reward ratio for Nifty Futures is in favour of Longs as close to 5408 as possible and shorts as close to 5532 as possible with appropriate hedges.

I missed out on the aspect of lesser number of trading days in yesterday's post. For both Nifty and Banknifty, the best way to play out the futures is Long Current Series - Short Next Series or vice versa. Hence for a few days, low margin players still need to wait till the trend becomes clearer. For now we can assume that the market is consolidating for the next move and will take some time to rationalize the fast and furious upside of 544 points in 16 days [20th June to 6th July moved from 5196 to 5740] and then another rapid downside from 5690 to 5480 in 4 days [25th July to 28th July]. Eventually Nifty has to rationalize both these moves at about 10 points per day which I presume will happen through out August series. [The current natural rate of change on Nifty is 10 points per day in terms of calendar days]

EOD Analysis for 1st August 2011 and Outlook for 2nd August 2011

The volumes through out the day were pretty thin and Nifty Futures OI stood at 21.2 million throughout the day. Banknifty and Nifty both witnessed some gap-ups but with thin volumes that could not be sustained. At one point of time Banknifty had crossed 11050 and Nifty was well above the 5532 mark but as mentioned earlier as well, it will take some more time and effort to positively overcome the 5532 barrier on Nifty and 11000-11050 mark on Banknifty.

The retest of 5480-5532 zone seems to be done with for now and one retest of 5408-5440 zone may come in around 3rd August to 5th August period. 3rd August marks an important change in the monthly as well as quarterly financial calendar for Nifty and astrologically, Mercury will start retrogade motion from 3rd August. In the first quarter of 2011, when Mercury went retrogade, some sharp falls were seen on the bourses and one needs to be cautious this time as well. Moreover, 2nd August marks some important announcements from the US Government about the debt levels. One should bear in mind that the markets have long ago discounted for a lot of negative news from the US when the QE2 discussions itself were on-going.

All the scenarios have been taken into account and smart money knows for sure that there is a lot of trouble brewing in the G8 countries. What we will see now is just some short term fluctuations or knee-jerk reactions. Some experts have gone on to say that the Dow has already peaked with its May2nd 2011 rally; whilst we have witnessed multiple tops and bottoms in between, for the short term, liquidity in the markets will keep going and there will certainly be an attempt to take out the May 2nd high on Dow after 23rd September 2011; Whilst one can hear noises about 14k, 15k on the Dow, that has to wait for a long time now. The maximum upside IMHO the Dow can have is 13200 for 2011. As regards smart money, the portfolios have been hedged upto 2013 as American Options are much more dynamic than European Options that we follow on Nifty. FTSE has a pending target of 6400 which will also come later this year after a retest of 5550

Coming back to Nifty, the hope of a bull run is still intact with major upsides coming in after September 23rd as well. To the extent 5408 holds out on EOD basis, markets are very safe. To the extent we don't go below 5177, the 11th Feb low, the hope of a new high towards Diwali remains intact. However, if we go below 5177 on the backdrop of weak global cues in August, the upside for remaining part of 2011 will get capped at 5944.

For August series, a close below 5408 on Nifty and we open for 5348, 5280, 5225, 5177, 5092 (Last hope for any meaningful upside) 2 consecutive closes below 5408 will bring a 99% probability of going down to 5225.....

For now the crucial levels remain the same
For The Downside: 5408;5440;5480
For The Upside: 5532;5580;5608;5655;5690

As far as positions on Nifty are concerned, it still would be prudent to wait till the uncertainties are cleared. All positions must be appropriately hedged. For Nifty, one can take short positions in the 5532-5550 zone with a 5600 August CE as hedge 1:1 ratio. Targets are 5480-5450-5408 in 1 week time Stop Loss at 5565 for Short Nifty and 5520 for Long August 5600 CE (all index values are spot values)

For Banknifty, frankly there is nothing much to play for and the options premium are too high for hedging. If one has margin, a safe way to play Banknifty would be Long August Banknifty - Short September Banknifty or vice versa. Support levels for Banknifty are 10600-10660 zone and 10750-10800zone and 11000-11050 zone. However, with bad news looming, 11k-11050 is turning out to be a short term resistance. If one has margin only for 1 lot, it would be be better to get more stock specific and avoid Banknifty for a few days.

Trendline Techniques

Hope all are enjoying the weekend. Some of you asked me to explain the technique of using permutations and combinations of Highs and Lows and then channeling out for intermediate highs and lows.

Please click this link to see an illustration with 4 major lines Trendline Basics

This is the Nifty EOD Chart from Jan '10 till date. I have drawn the 4 major trendlines as follows

Major High to Major High
Major Low to Major Low
Major Low to Major High
Major High to Major Low

Now all that one needs to do is use a slide-rule or setsquare-ruler combination and start fishing for parallel lines that connect intermediate highs and lows. For most liquid stocks and indices, parallel lines to the 4 major lines mentioned above will cover all swing tops, bottoms of major and minor levels and also give an insight to the geometry that the counter is following.

Wishing you all the very best in your attempts to try trendlines and channeling