Friday, August 9, 2013

Why Many EW Counts Go Wrong in India???

To begin with, I must admit that I am still pretty a novice with EW counts but have seen a lot of charts, labels, counts made with the aid of EW and yet, most often than not, things don't fall in place. Is it the case that the EW Theory is wrong? Many a time, people feel, this may perhaps be true because even Bob Prechter and his team have got a lot of counts wrong since May '11.

As I have kept mentioning earlier this year as well, the real reason why Bob Prechter and team have got counts / trades wrong is because they are 'looking for what they want to see' and 'what they feel'. It is precisely this own bias clouding judgement that has gotten them all over currently. Is this the first time that it has happened to them? No, perhaps around 2005-2006 itself, they had put some illustrative charts on Fannie Mae and Freddie Mac and predicted that they would become penny stocks. Did it happen? Yes it did but just that it took 3 more years to happen.

Coming back to the Indian scenario and why a lot of applied Elliott Wave Analysis goes wrong. Let us go back to the 'fundamental ground rules' laid down by Elliott for scrips that do follow the Elliott Wave patterns [all covered in Chapter 1 and Chapter 2 of the book]

1] Most commonly applicable on Market Indices
2] Applicable to cyclical industrial stocks and stocks that have healthy volumes [When the volumes are being spoken about here, remember that the initial Elliott Wave principles were laid down in 1920s and 1930s. So even on NYSE, the volume implied 'Delivery Volume' as the proportion of day-trading was minimal]
3] The index or the scrip must be able to follow a hierarchical structure of Super Cycle, Major Cycle, Minor Cycle going all the way down to minuette and sub-minuette levels. [Again remember, the smallest time frame available to Elliott at that time was 15 minutes and he chose to keep the least count at hourly basis]

I have seen many attempts at many forums where people are looking at 2 minute / 5 minute charts, looking for divergences etc but that is nothing more than an 'itch' to take a position or 'restlessness' to see a position move in favored direction. Sometimes, labelling at such fine degrees may fall in place but most times it won't. If one wants to have a good count of Nifty / BankNifty, the smallest time-frame used must be 1 hour IMHO

The other principle of selecting the scrip and ensuring that it is suitable for EW Analysis

First of all take the Monthly / Yearly chart of that scrip and see whether there is a hierarchical pattern with a large uptrend / downtrend and then waves / sub-waves within that. If such a pattern is visible on Monthly / Yearly charts ONLY then it should be considered for counts.

For illustrations

Nifty Monthly / Yearly Charts All-Time

The fundamental principles behind EW are

1. Mankind has been made for progress in the grand scheme of things
2. In progress, one moves 5 steps forward and 3 steps backward

So taking these principles into account on the Nifty Monthly Charts [We are still in the nascent stages of what is called 'Grand Super-Cycle]

The 1st Grand Super-Cycle Wave completed as a set of 5 Super-Cycle Waves when Nifty attained 6357 in Jan '08. After that, it has been in a corrective phase that is still on-going. If you feel that this is so time-consuming, I would encourage you to look at the Monthly/Yearly Charts of DJIA. For more than 6 decades, it was struggling in a range of 50-1000. It is the so-called 'Roaring Eighties' [The Baby Boomer Generation in Marketing parlance] that all resistances became history for a brief period of 5 years.

When will the Grand Super-Cycle 3rd Wave start for Nifty in India? Well that is difficult to answer as I don't have a crystal ball with me. However, the affirmation of the same can be confirmed when Nifty takes out 6357 with loads and loads of buying in cash by institutional investors and with significant delivery volumes. Howe high will that be? 1.618 times the 1st wave i.e. towards the 10K or 11K mark on Nifty. When will that happen? 0.618 times the time taken for the 1st wave to get over. It took almost 8 years for the 1st wave to get over. So it will still need a good 5 years after the current corrective phase is done with.

Before I dwell more upon this aspect, let me show you some charts where EW principles are clearly not applicable

DLF Monthly Chart
Is there any resemblance to the multi-year chart of Nifty? Its just headed one way since inception and that is down south i.e. sooner or later this will go to 0. Does this imply progress? I don't think so. So any trade taken on DLF with the help of EW will be a fluke as the scrip does not meet the basic criteria of EW principles.

ITC Monthly Chart
Does this qualify for EW Analysis; indeed yes as the progression is steady; volumes were high when it was trading at sub-25 levels and now it seems to have conquered all visible resistances and is trying to locate the next resistance.

Why these illustrations of DLF and ITC ? Just to drive home the point that scrips like JPAS, HDIL, IVRCL, IFCI, Suzlon etc etc never complied and perhaps will never be able to comply with Elliott Waves' fundamental criteria.

Bottom-line: EW works perfectly well on scrips that in the larger scheme of things obey the principles of 5 steps forward 3 steps backward criteria. If that is not the case, then forget applying EW principles to those scrips as probability of making losses are greater than otherwise [and we trade/invest for profits right???]

The next part that I mention maybe easier to say on hindsight but it is critical because this again corroborates my earlier comments that there are only a few trading sessions in a given year where in big gains can be locked in. One is free to look at the ticker as much as one wants but for long term gains, positions must be very little but those that garner large gains

Nov'10 onwards [13 month correction]
A:  a: 6338-5690; b: 5690-6181; c: 6181-5177
B:  a: 5177-5944; b: 5944-5196; c: 5196-5708
C: a: 5708-4721; b: 4721-5400; c: 5400-4531
[This entire structure completed a larger degree A, by the way after which the rally from 4531 started]

Again, the structure was a double zig-zag with more swing moves within but this is the larger scheme of things. In a 13 month period, these 3 corrective waves and their sub-waves gave a total of 3000 points. Given the fact that depending on time-frames one takes into consideration and stop losses being triggered etc, even if 2/3rd of these moves were captured by a savvy trader, 1 lot would have yielded 2000 points.

Now this is particularly important as the current downward move is pretty much on the same lines as the correction from Nov '10. Should you be alert and wait as a safe trader for the opportune moment to present itself on EOD basis, there are about 6 more legs of 200-300 points minimum [could go as high as 700 points] waiting to be lapped up. Rather than take a position everyday/week, hold on to the margins and once the signals come in go full throttle with 3 to 4 lots via futures and options.

So to end the entire sermon like post on Eid;
EW principles are absolutely valid [provided the conditions specified are used appropriately]
EW principles take into account Fibonacci ratios, time and price factors, supports and resistances as well
The least count time-frame to use EW analysis is 1 hour [60 minutes]
One should not be biased with one's own trading position whilst applying EW Analysis [or for that matter any form of price/technical analysis]
You just need 3 to 4 trading positions in a year to get whoppers and not positions everyday especially in the FnO segment


Tuesday, August 6, 2013

New RBI Governor Announced - Pros/Cons - Welcome Desi QE

Well a very well read economist selected to head the RBI i.e. India's Central Bank.

First the good parts - he understands that the basket of goods to be used to measure inflation need to be constantly updated. Very sound knowledge of concepts of Game Theory [In fact enjoys good camaraderie with the likes of Avinash Dixit in Princeton University, a contemporary author  in Game Theory, Pankaj Ghemawat, a leading authority in Corporate Strategy who was also instrumental in setting up the big stage for TCS with Ramodrai] and for that matter, pretty well networked with the likes of Ben Bernanke, Mario Draghi etc. So much so for pedagogy and personal accomplishments. In fact, as a faculty in university, Senor Raghuram has been in the top quartile in rankings for most of his tenure as faculty.

This brings in a lot of fresh lease of energy and ideas to the table with a potent mix of student @ emerging nation, evolved @ developed nation, repatriated with a cocktail, back home. FIIs would love the fact that a protegy of FIAT currency policies is finally making it to our own desi RBI and perhaps hope that FIAT currency policies will be replicated here as well. The probability of this happening is very high.

Now there is more than what meets the eye in this selection process. First and foremost, Subbarao has most of his experience home grown, understands the macro-economic situation of India extremely well. He is not the one who buckles under pressure and tries his best within the limited arsenal of tools that he has to stem a currency riot and keep bond yields under check without injecting too much liquidity [knowing very well that his counterparts in US, UK, ECB and Japan are rampantly doing so in turns] He is not the one who buckles under pressure even if the hotline rings from Chidambaram or Manmohan Singh. Fortunately neither is Subbarao like Durga Nagpal nor is Chidambaram like Akhilesh Yadav or else things would have been far worse than 2008 in Indian macro-economy by now!

The most logical step would have been to give Subbarao an extension of term because with due credit to him, despite so many hurdles beyond control and limited tools awarded by Indian democracy, he has done the fair bit from his side. The case for the same becomes even stronger given that the erstwhile deputy S. Gokarn has joined some other institution. No the UPA government found Subbarao a pain for them to continue their hyperinflationary monetary easing policies. Even more so because having been institutionalized in the Indian bureaucratic system, he knows to have his cake and eat it too.

Whilst the external perception is that Raghuram will bring advanced policies to India, the euphoria will be short-lived. Given most of his career formative stages in US, senor Raghuram will try to replicate the economic models of the west [read US] into India. That is too rudimentary because the US Dollar is the reserve currency of the globe and to the extent this holds true, Keynesian economics will only hold true under such conditions and not an economy like India.

Just as the Government of India is one of the largest clients for McKinsey India [reports are made and filed without action], it will be one of the largest patrons of senor Raghuram and put him on a pedestal in public. He may be given a lot of incentives but the veiled threat will be 'Toe the line or face consequences'

Now time will tell whether Raghuram will do so or retreat into his comfort zone and go back to university. In the opening phases of his term as the RBI chief, his policies will be very very accommodating i.e. very very positive for stock markets [post-election 2014 of course]. There will be asset bubbles in real estate, gold, silver big time; prices of rice, sugar, cereals, wheat etc will double in 3 years instead of the current cycle of 5
Balance sheets of banks will swell and loans will be offered by the dime to almost anybody and everybody.

Then, the next step will follow; CAD issues. He would then apply the ISLM models and ask government to reduce taxes on crude oil and take steps to eliminate kerosene and subsidies. Will the ruling party at the centre bite the bullet? No ways be it UPA or NDA or Third Front - nothing to do with vote bank politics and large chunks of money to be made in taxes and tax evasions will ever be altered [unless GOD comes down and forces it on Indian politicians] Now senor Raghuram will feel cheated having given his share and getting nothing in return. To the extent all his reports and comments will be stonewalled. The story comes a full circle.

More and more NPAs on banks' asset books [perhaps as high as 5% of the loan books], a Rollar near 70 levels and a total systemic collapse. Is there anything we can do to stem this rot? Well nothing - keep yourself tuned to the time and price actions. The story of 2009-2010 is very soon going to  unfold after the next elections. Ensure that profits are booked on time. Enjoy the next mega-bull run post-election 2014 as your next central banker is going to unfurl the Desi Version of QE.

Nifty Achieves Upside Target of 5944 in July '13 and Downside Target of 5532 in August '13

Well this small post is out of rejoice for the forecast given at the end of June '13 in this post

Nifty has achieved both upside and downside targets. BankNifty achieved the downside target but unfortunately did not meet the upside target.

Tata Steel and JP Associates in delivery based buying fizzled out.

So Trading + Investing put together in the last 2 months helped gain about 600 points on Nifty and lose 30 points on Tisco [in equity segment] and 15 points on JP [in equity segment] so on balance a pretty good result.

Where will the carnage end and when will the relief rally come; I really don't know and the same will be updated on Twitter [you can get the feeds in the top left side of this blog or follow @NiftyParadox]

To summarize, one need not take a position every day; one needs to thoroughly study the charts and price-volume patterns. As I have been repeatedly saying, out of the 200 odd trading days in a year, only about 50 days come with large 250+ point moves in either direction of Nifty. The only ones who get rewarded in the long run are those who sharpen their weapons and take positions at those opportune time-price movements. See the ticker for as long as you want but take fewer positions and garner those points.

Enjoy this wonderful song: