Monday, September 23, 2013

Market Updates Post-German Elections / Opportunities for Nifty Traders

So as of the latest count, Angie Merkel and her party won the clear majority as of last count last night. The downside is that the current coalition has gone for a toss and a new one has to come into play. It will be a good 8 weeks before the final government and manifestos are in place. First of all, let us look at some of the basics

European political history suggests that only few leaders so far in major economies have got a 3rd term in office over the last few decades. Margaret Thatcher from the UK, Konrad Adenauer and Helmut Kohl from Germany have had the honors. History suggests that the last terms for all these leaders have been chequered. [And same has been the case for US Presidents in their 2nd terms]

The Euro has shot up marginally post the event and was one of the largest gainers after US Fed announced the holding back of tapering for the time being. 

Markets are so far celebrating the 3rd term of Merkel in anticipation that her aim of keeping the Euro intact will continue. What a vast majority of people have not factored is that fact that although Merkel has been talking about saving the currency, her underlying aim is to save Germany. By helping out PIIGS, Merkel has ensured near-zero borrowing costs for Germany and the DAX has been roaring because Merkel has ensured that a large part of the bail-out money is funneled back into the German economy. This is hardly surprising because Germany is highly dependent on exports be it international or intra-Europe.

What a lot of people are lot factoring in is the fragile condition of European economy as a whole. We know where the PIIGS stand. UK, barring the housing bubble and a few tech start-ups has not been able to revive the job market. It is instead busy creating the next sub-prime housing bubble [and the process has just started. Will take at least 3 more years for this bubble to burst]
The Danish economy has gone for a tailspin with average debt levels at over 350% of an individual's networth. The housing market is deep under-water and the government has had to overhaul the mortgage system to an 'interest-only' mechanism until further signs of improvising [another indirect QE and ensuring that people are under debt]

To summarize the situation in Europe, the risk that an immediate threat of some form of Euro-zone exit [either by Germany or by booting out some member] is averted for now. Bulls will be happy with that. Turbulence will continue for another 10-12 weeks. IMHO, there are some major surprises from Europe still pending and in all likelihood will still end up coming from Germany or Finland over the next few weeks!

On the other hand, the annual drama about fiscal debt and the debt ceiling started again in the US. Obamacare is being pushed back and the Republicans are trying hard to scuttle the Democrats' path of QE forever. Even that is an anti-incumbency sham because the Republicans also engaged in similar tactics. The turbulence on a day to day scale may seem funny but the bottom-line is that US is credit-addicted so no change expected from there.

How does all this pan out for India? With high dependence on FII inflows, Nifty tends to react almost everyday with either a boom phase or an absolute gloom face. The next 3 days of price action can almost entirely be ignored due to expiry week. However, I must caution the bears about Nifty closing above 6225 and more importantly above 6280. These are 2 very crucial levels and hence I have been reiterating that one should not jump to shorts till a firm close below 5740 is in place. Whilst on the upside if those 2 crucial levels are taken out, bulls will be on more rampage.

To recap on my earlier outlook I had given 3 levels on various time frames

EOD > 5445 is bullish and only a close below 5348 can signal reversal. This was the beginning of September and was taken out with conviction. Now that level has come down to 5944 on the daily time frame [Right now daily bias is bullish]

EOW < 5740 is bearish and a close above that will turn weekly signal to bullish. This has happened in the last 2 weeks and on a weekly time frame, this level stays intact. As long is Nifty is above 5740 on the weekly time frame, it is advantage bulls - period

EOM < 5803 is bearish and a close above that will turn monthly signal to bullish. This is the crucial level we have to look at when we evaluate closing price of 30th September 2013. The higher time frames have greater weightage and they tend to assert themselves unless the contrary price and volume action is strong.

On the EW front, my preferred count was looking at upside capped at abut 5944 levels and that went for a toss. I consulted a couple of experts on EW as to where my analysis went wrong and I got the answer from an expert master of EW in a precise concise manner. When the fall is a 3 wave fall, the subsequent rise is very steep. My mistake was that I was expecting an exact replica of Nov '10 to Dec '11 fall. Hence I expected a lower top on every rally. With this 'bias' I missed out on the crucial alternation rule of 3 wave fall-5 wave rise with deep retracements. Hence the emphasis now comes to 6225 and should that be taken out on closing basis [and more importantly 6280] then it is advantage bulls all the way.

I have always been an advocate of learning where analysis went wrong and also acknowledging my mistakes with the reasons and price levels. I was looking at shorting the rallies in Sep '13 with SL at 5740 and got stopped out [the twitter updates confirmed that as soon as it happened] Now people 'itching' to short still need to wait for prices to close below 5740 before initiating fresh shorts.

The critical Gann dates almost always bring large price swings in the 2 weeks around those dates. Yesterday was Fall Equinox. So lots of volatile price action expected in either direction. In fact these are good times from a trading perspective. It would be very prudent right now to build the following straddles

Oct 6200 Call with Oct 5800 Puts [or Nov 6300 Call with Nov 5700 Put] in ratio 1:1. Target exit points are +250 points from CMP or -250 points from CMP that will ensure that the gains remain 50 points per lot on the entire spread. SL would be when the combined premiums fall below 50% of premiums paid. Time frame: 8 to 10 trading sessions.

Uni-lateral positions [i.e. only long or only short] should be taken only after prices take out crucial levels. Closing above 6225, longs have higher risk reward outlook. Closing below 5740, shorts have higher risk reward outlook. Enjoy the volatility first on account of Nifty expiry and then on account of post-equinox effects!

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