EOD Analysis for 12th August 2011 and Outlook for 16th August 2011

Nifty started on a muted note yet again and the volumes were pretty much the same as yesterday. Roll-overs can be seen in Nifty futures already. Banknifty is yet to take out the crucial zone of 10400;10660 on the upside. The long weekend brought about a lot of profit booking and possibly some margin calls as well. The broader markets also under-performed and we did not take any cue from Europe or other markets.

IMHO, there is a fundamental and sentimental outlook to this performance on Nifty in the last few days. The monsoon session in the parliament has not at all brought any confidence to institutional investors. All that we are seeing is a lot of mud slinging and adjourned sessions with no progress on any significant issue. Moreover, with political unrest in so many parts of the country, there will be a natural risk aversion to India for the very short term and it is critical for political and business leaders to bring that confidence in the India growth story.

Technically, we have closed well below last week's close [I was expecting a cross-over of the critical 5177-5225 this week but it was not to be] Crucial levels remain unchanged

For Downside: 4950; 5020; 5092; 5120;5177;5225
For Upside: 5240;5280;5308;5348;5378;5408;

As I mentioned yesterday, a close above 5092 would keep the expiry target of 5408+ intact while it would need reconsideration with close below 5092. This needs reconsideration and we now should not expect anything beyond 5348 on the upside for August series expiry.

There is a lot of weakness in the market and below 5020 on Nifty spot there is a high probability of revisiting 4950 levels. If the carnage does not stop here, then it may go all the way to 4800-4900 levels where some bottom fishing may come through but then it will further limit the upside for August expiry to 5225 levels.

As far as portfolio building for short-term upside is concerned, there are value buying opportunities available in the banking, automotive and FMCG counters.

Now Nifty has to take out 5225 on EOD basis as quickly as possible and 5543-5655 levels by mid-September. The damage is quite a bit right now and there are gaps on the upside to be filled. Upsides will only be possible with 2-3 gap-ups in time to come.

EOD Analysis for 11th August 2011 and Outlook for 12th August 2011

Nifty opened on a mild note today and the volumes were pretty thin. So the volatility was relatively lower compared to the last 2 days. Banknifty led the charge in the morning but gave up on gains within a couple of hours. Some relief was seen due to short-covering but that didn't help much either. In fact it was Reliance pack that kept some steam despite Banknifty giving way today. There was profit booking in the auto majors with a little bit of short-covering.

Nifty is repeatedly failing to take out 5177-5225 on EOD basis and it is very critical for Nifty to cross-over 5225 on both EOD and Weekly basis tomorrow. However, with little support from Banknifty as well as other major counters, it will be a little difficult to achieve that tomorrow unless we get some positive cues overnight from US and some cheer from Europe in the morning tomorrow. Tomorrow is Friday and the markets are closed on Monday. A lot of positions will be either chopped due to margin calls or traders / fund-houses will clear their positions to avoid taking risk all the way to Tuesday.

The crucial levels for Nifty remain unchanged as of now
For Downside: 4950; 5020; 5092;5120;5177;5225
For Upside: 5240; 5280;5308;5348;5378;5408;

To the extent we do not close below 5092 on EOD basis tomorrow, expiry target remains at 5408+ levels for now. A close below 5092 will make Nifty vulnerable again to retest 4950 levels and make 5177-5225 a very critical zone to cross over. However, once 5225 taken out on EOD basis, 5308-5348 zone can be achieved pretty quickly.

Banknifty closing below 10400 is not a healthy sign at all. For sustained upside, Banknifty must take out 10400 and then 10660 zone as soon as possible. To the extent 10660 levels are not crossed over, it will start going back to 10250 levels against weak global cues.

The options premium are swiftly drying up and the high Put Premiums on 5200 PE / 5300 PE relative to spot values as against par values of deeply ITM Puts suggests that a couple of gap-up openings are highly likely during this series and fill up the gap-downs that we have. But I must reiterate that some pain is still remaining.

It is better to stick to futures at the moment and avoid options and for tomorrow, all positions must be ideally closed regardless of profit or loss. It is better to take fresh guard on Tuesday depending on market conditions.

EOD Analysis for 10th August 2011 and Outlook for 11th August 2011

Nifty opened with a gap-up today following some tranquility and filling up some of the gap-downs. Banknifty led from the front as expected with a whopping 2.75% gain in the morning session. It was intriguing to see so many shorts built up and Banknifty futures of both August and September series trade at deep discounts for a very long time in the middle session today. This is yet another unprecedented move on the bourses in the 2011 series.
[In June series we had Nifty futures of the next series trading at a discount by end of May series]

As indicated yesterday, the call premiums rose despite a falling market and OTM Puts like 4900 PE were trading at exorbitant prices and that too in a low PCR scenario. On opening itself a lot of OTM Puts were crushed to almost half their values [they never had intrinsic values anyways and with a fast premium eroding scenario, one should not be surprised]

It was actually a mixed bag performance from the rest of the Nifty counters and a little more pain is likely following weak global cues. This is the third consecutive close below  5200 and we are below the crucial level of 5177. Global cues are mixed and we may see one more visit to the 5120-5075 zone before resuming towards the upside next week. A close over 5225 will bring in some fresh supply of Long Positions hopefully.

Unless 5225 is not taken out convincingly on the upside for Nifty and 10660 levels for Banknifty, there is always the danger of Nifty falling again. The optimism for more upside in the coming few sessions stems from the fact that even 55/5400 PEs are going almost at par [agreed the time value is decreasing fast]. A close below 5092 remains a pain point for bulls that can suddenly trigger a sharp fall.

Crucial Levels remain unchanged [until we take out 5225 on EOD basis]

For Downside: 4950;5020;5092;5120;5177;5225

For Upside: 5240;5280;5308;5348;5378;5408

As of now expiry target remains unchanged @ 5408 plus levels.

EOD Analysis for 9th August 2011 and Outlook for 10th August 2011

Nifty opened with yet another gap down, got a lot of short covering only to reverse a lot of gains again. Volatility is extremely high and markets are in a mode of panic. The fall below 5000 has been ominous and as I mentioned yesterday, each fall now goes on capping the pending upside on Nifty. Today, we had the 2nd consecutive close below 5200 and a close below 5092; there may be one more round of panic selling before we see some relief on the bourses.

Whilst Puts gained a remarkable percentage today, what was striking is the rise in call premiums of 53/54/5500 Strikes during the second recovery at 5050 levels. We need to realize that a lot of this selling is due to obligations of hedge funds on western bourses. Hedge funds have been heavily leveraged with long positions and the bloodbath that has followed is bringing a lot of margin calls. Fundamentally, we should be around the 5200-5400 band given the macro-economic outlook. However, markets have a tendency to overvalue or undervalue securities at any point of time (rarely fair values). Moreover, the political instability in the monsoon session of parliament is doing nothing to assure markets of better prospects;

As of now, I still maintain that expiry target of August series is around 5400 levels and we should start seeing some positive changes by the end of this month. The upside is capped to 5944 for rest of 2011 and you can refer to yesterday's outlook on how this can change

Major Levels For This Month
For Downside: 4920-4950-5020-5050-5092-5125
For Upside: 5180-5225-5280-5320-5348-5378-5408

We have already opened 4950 this morning and if Nifty does not take out 5092 on EOD basis tomorrow, sub-4900 levels will be a reality. It is good to see banks staging a pullback [granted that a lot of gains are being reversed by EOD] LnT also is managing a pullback but the main culprit for Nifty seems to be Reliance. Unless Reliance turns around well, Nifty values will continue to be lower.

We need a close above 5225 by the end of this week and right now I am pretty optimistic about the same. Tomorrow's EOD will decide the fate of Nifty for this week

EOD Analysis for 8th August 2011 and Outlook for 9th August 2011

Nifty opened with yet another gap down and was badly badgered before getting some meaningful recovery only to reverse the gains. Banks led the way in the pullback and that was heartening to see. The volumes have been on the higher side for the last 2 sessions. We also have seen a series of gap-downs from 5400 levels and I expect these to be filled up by the end of this month. Weakness still persists in the market, especially with heavyweight Reliance falling so sharply in the last 3 weeks.

The options data continue to be noisy. Deep ITM Puts of 57/56/55 PEs hardly are commanding any time value premium and the OI is remarkably low. Deep ITM Calls like 5000/5100 still are commanding a premium but not many takers for it. On the other hand, OTM Puts like 5000, 5100 are commanding significant time premiums of 60 and 90 respectively and still there is an OI of over 7.25 million for the 5000 PE; On the Call side, 5500 CE has an OI of almost 8 million and 5600 CE has OI of 7 million with time value premiums of 18 and 9 respectively. All this is only adding fire to the carnage on the bourses and it is in fact option writers who are taking the index up and down and crushing out options one after the other.

I might be a bit biased with my personal opinion on gaps filling up but the high Put premiums at lower strikes and hardly any takers for Deep ITM Puts is also an indicator to me that the downside is limited right now to 5020 levels max on intra-day basis and 5092 on EOD basis.

Today is actually the 1st EOD below 5200 in the whole 2011 series and today is an important date in the Nifty 2011 Calendar; it marks the entry into the Solar angle of 135 degrees and a major trend change will come through only after we cross over the 150 degrees angle towards the end of the series.

Repating Conditions For Upside and Downside Targets

For Upside
I had mentioned that a close below 5408 before 10th August will cap the upside to 5944 for remainder of 2011. That stays and conditions for higher values are as follows

1] EOD above 5944 within 17th October 2011 [give or take a couple of days on either side]
 1 close above 5944 will open Nifty for retest of 6080 levels
 2 closes above 5944 will open Nifty for 6280 levels
 3 closes above 5944 will open Nifty for retest of old highs
 5 closes above 5944 will open Nifty to create a new high [but the time target is also crucial]

For the Downside:
1 close below 5408 and we open for retest of 5280-5348 zone [Done already]
2 closes below 5408 and we open for retest of 5177-5225 zone [Done already]
1 close below 5177-5200 zone and we open for retest of 5065-5125 [Done today prior to EOD today]
2 closes below 5177-5200 and we open for retest of 5020 [We have visited this zone today and possibly can  go once more this week]
1 close below 5092 on EOD basis and we open for retest of 4900-4950 levels.

Whilst there are a lot of negative cues, I expect buying to come back within 5000-5080 levels on the cash side. The options premiums for OTM Puts and the fact that there were a lot of short 5400 PEs in the system when the series opened also suggest that we will see the expiry on a better note.

1 close below 5092 and the upside for remainder of 2011 most likely will get capped at 5532-5690 levels and as I have always maintained, right now is the time for bottom fishing for short term upside; it is also important to monitor higher levels and exit from long term holdings as the threat of 4800-4600 and eventually 4350 is very real. There is no perpetual rise or fall. We are bound to see a smart pullback on Nifty by the end of this month and then some significant upsides from 23rd September.

The FnO Data as of now suggests that we may see August expiry above 5408 levels. Buy on Dips remains the preferred strategy by shorting a Call of the nearby strike as hedge [the premium on Puts is too high and time value keeps on deteriorating fast in flat sessions] We have dropped 650 points from the July 30th till date at ROC = 81.25 points per day. The normal ROC is 10 points per day. 50% of the fall is bound to be retraced prior to expiry. Moreover if the fall came in so quickly that too with gap-downs; so 5365 is a natural target prior to expiry. Short-covering and positive news from the western world will possibly help Nifty tide over the crucial level of 5408 by the end of the month.

However, the lower we go each day now, the lower will be the target for Nifty's pending upside. LnT and Banks are doing their bit to salvage something on Nifty. Unless Reliance turns around, Nifty index values will continue to be on the lower side.

Global Markets Outlook
I had mentioned in a few posts before that FTSE has a pending target of 6400 for this year to the extent 5500-5550 is maintained on the downside. With that having gone for a toss, it is safe to assume that the top is in place for FTSE. Only a close above 6150 can change that for FTSE and it seems unlikely given the way UK banks are poised at the moment. A lot of the 'Assets' that are reflected in UK banks are interest payments on mortgage and business credit. The mortgage in late 2010 and early 2011 has again taken form of  sub-prime and a lot of business credit is at risk. So when the markets start adjusting for the same on Mark To Market losses, bank values will automatically go down thereby triggering a systemic crash on the bourses. Other events in peripheral Europe are not helping either and what happened last week was as good as the last nail in the coffin for Europe; France bond yields have started increasing and investors in France's debt are demanding premiums on the coupon rate which is a very ominous sign. The other part is the premium on CDS for European debt; the CDS premiums are rising faster than the slowdown [although it will cool down a bit in the next couple of months], it is curtains for Europe.

For the Dow, a 10% correction was very normal after having marched so much past 11k in the last 6 to 8 months. The top is pretty much in place at 12873 but there will be 2 more attempts to take it out. The current fall is more due to market manipulations between the institutional fund houses. Throughout May, June and July, there were a lot of shorts in the system and they were getting chopped off royally. Likewise there were too many longs with low margins [I have highlighted this point time and again that the Mutual Fund houses are making a terrible mistake by keeping lower than 5% asset values in cash]. The holders of short positions are deliberately trying to create pain for bulls and the fact that they need liquidity.

Eventually, all are headed for a crash. I do respect Nadeem Walayat [you can see his projections for the markets in the homepage of this blog] and his views but he is missing out 3 critical factors in his ultra-bullish outlook

1] First, he is looking at the fall of currencies to help make exports from the western world more competitive
[What he is missing out on is the fact that there is a demand slowdown with these falls and to the extent there is lesser demand, prices will keep going down in a vicious circle]

2] Falls in indices will get buyers who are bottom fishing be it on individual level or institutional level
[What he is missing out is the fact that institutional fund houses by and large are already heavily leveraged and have been chopped off on both the short and long side. Now even when tranquility returns to the market and value buying opportunities will be available, it is highly unlikely that prudent institutions will take on complete leverage again. The retail investor has already started using credit cards to pay utility bills and is holding cash or equivalent at less than USD 10k or equivalent in PPP terms, uniformly in the western world]

3] Bank debts are anyways covered by the government [he has also acknowledged that the countries are insolvent] but right now the most important concern is who and how will the sovereign be bailed out? The stress tests that were conducted still have inherent flaws in them; the model assumes a slowdown and how that affects credit growth and asset values. What the stress tests have not taken into account is that the asset values are plummeting rapidly which increases the stress on the banks. Case in point is Banco Santander that holds assets worth almost 1.2 trillion Euros on its books. As per unofficial estimates, at least 40% of that value will be wiped off merely by credit defaults and mark to market values of properties associated with that. [Whilst nobody apart from insiders know how much CDS has been taken as insurance by the bank above government aided backup but current CDS values are so high that there is literally no cost-benefit associated with such a late reaction now].

Another nail on the coffin for Eurozone is the fact that Italy and Spain have been offered the option to withdraw the bailout offer for Greece, Ireland and Portugal due to internal problems in Spain and Italy itself. If that happens, the next to withdraw the bailout offers will be the Nordic countries of which Finland in particular has been very vociferous about the bailouts to Portugal and Greece. Now with French bond yields going higher, and the only country left to salvage Europe is Germany and the ECB; barring a few relief rallies, Europe is all set to collapse.

[Sources of Data on European and American macroeconomic conditions courtesy reports and articles on Bloomberg, ElliottWaves-Socionomics, CNBC, BBC and Financial Times]