Outlook For October 2013

So, some excitement did come through after 22nd September, Fall Equinox. The German election result as of now seems a non-event. I have made one update and when I discuss Global Markets, will cover them more later in this post.

Coming to Nifty and BankNifty, let us first review the charts

Critical Levels as follows

As long as Weekly prices are above 5740, bulls can spring a surprise.
The most important level to watch out for is 5803 [+/- 15 points] on EOD 30th September. Holding 5803, the bearish possibility on Nifty gets delayed further. To call a 'Bull Market Breakout', 2 consecutive closes above 6280 are needed.

As I keep saying every month, so far we have never had a 'secular bull market' in India with Rollar above 48.25. Also Nifty so far has a jinx that when it opens in January above 6000 levels, it tanks to lows in the Oct-Dec period of that year (2008, 2011). Whenever we have had Nifty options in steps of 50, it has done badly for that year (2008).

The overall bearish conditions are satisfied but as my shorts in Sep got stopped out at 5740, I would not encourage fresh shorting till 5740 is breached on downside (Once bitten, twice shy). Many a time, people think that Not Bearish = Bullish and Not Bullish = Bearish as far as my outlook is concerned. I don't know about others but as far as Im concerned, my outlook goes Bullish - Neutral - Bearish - Neutral - Bullish. The 2nd part one has to bear in mind is the timeframe. As all seniors in the market will advocate, the higher timeframe view has more prominence than the lower timeframe view. The way prices are poised right now, this is my outlook

Daily Timeframe: Bullish till EOD > 5810 [This is to decide on taking a position for the next day]

Weekly Timeframe: Bullish till EOW > 5740 [This is decide a positional trade with 8-10 day horizon and reviewed every Friday]

Monthly Timeframe: Bearish till EOM < 5803 [This is to decide a positional trade with 4 weeks to 6 weeks horizon and reviewed on the last trading day of each calendar month, not expiry!]

To summarize, I could be bearish on daily basis but bullish on weekly basis and super-bearish on monthly basis. And not just me, any person with reasonable analytical skills will say the same. And also the fact that we have to be nimble footed and adhere to our SLs should the trade go against us and wait for the next signal to come. ('Itching' to take a position is trading suicide; discipline and patience is the key)

The levels are clear - so let us wait for Nifty to give the signal on 30th Sep '13. The preferred Bearish Count is still alive and I acknowledged missing out one crucial part in the EW analysis. The previous fall to 5118 was a 3 wave fall and hence a deep retracement was highly plausible. As long as prices are below 6225, the preferred bearish count is alive. Above 6225, that count goes out of the window for sure. The preferred alt 1 is already negated.

So there are only 2 plausible counts remaining

Bearish: 1 leg of fall pending on Nifty [1000+ points odd from CMP]
Alert Signal for INVALIDATION: Prices going above 6225
COMPLETE INVALIDATION: 2 consecutive closes above 6280

Bullish: Correction done at 5118 and new bull market has started
Alert Signal for INVALIDATION: Prices going below 5408
COMPLETE INVALIDATION: 2 consecutive closes below 5280

As I have also been mentioning regardless of where Nifty goes this year, next year is expected to be super-bullish after elections. So falls in 2013 must be used for accumulation. Preferred picks are NiftyBees, BankBees from the index based units; LT, SBIN, ITC, Tata Steel from the core index counters [Levels have already been given in previous posts] The index linked units ensure natural diversification of portfolio.
(Disclosure: Barring ITC and Tata Steel, I have long positions myself in other counters)

As of now Im Long Equities - Nil FnO. Long/Short FnO positions to be created after break-out / break-down signals emerge and will be updated on Twitter @NiftyParadox (Top left side of the blog)

Why things look super-bullish for India in 2014

Post-election results, most often than not have resulted in euphoria as the new government tries to scale down barriers for businesses and boost the economy. On a social mood phenomenon, India is at the cusp of an economic revolution just like the US was in 1980 [the roaring 80s as they called it]

During that time, the bond markets opened up big time, equities were soaring, the Dow made record highs. From a social mood perspective, the Billboard Chart Boards came up, more people started enjoying jazz, operas etc and the media space boomed. Fashion took new contours and there was a remarkable wave of freshness, cookery shows came up etc etc etc. Now just take a step back and see what is happening in India. Masterchef has gained importance, food is being looked upon as a lucrative business option, the colors in media be it films or television are all picking steam. Music has so many avenues and we have our own versions of Indian Idol, Sa Re Ga Ma etc etc etc. India's Best Dramebaaz, Dance India etc have gained significant momentum. Alternative cinemas are being embraced upon, people are becoming more fashion conscious and willing to experiment. People have become more open as far as relationships are concerned.

Social media has exploded and politicians are getting good stick for their foot in mouth diseases and customers are very punishing towards bad service be it from public sector or private sector. In Mumbai, open up the Mumbai Mirror and there are so many plays that are being patronized. 10 years ago, even a renowned theatre like Prithvi had to struggle to ensure adequate audience for plays. Only Gujarati plays, that too from a select audience used to get adequate patrons. Now, patronizing plays, music concerts is no big deal. More and more people are embracing them and these social indicators are very powerful signals. This India is changing for the better in many ways [and for the worse in many ways]

So the way I personally look at it, what US, UK witnessed in the roaring 80s, India will start witnessing post-election 2014. Also note the emphasis on 1980; [2014 = 1980 + 34; 34 is a Fibonacci Number] With so many different forms of analyses leading towards 2014, Im super-bullish as far as 2014 is concerned, post-elections of course. The downside of that is hyper-inflation and don't read too much into what Raghuram Rajan is doing now. He is carefully preparing his ground for Desi QE post-elections 2014.

Global Markets:

US: Don't read too much into the fiscal deficit debate in the senate. The US knows only one thing that is QE. They will continue to spend, continue to raise the debt ceiling and continue QE for as long as possible and as high a quantum as possible - period. They are now waiting to see the next Euro policy. Should the Euro-bailout move out, forget QE tapering, they will increase QE. Same is the case with the debt ceiling. If the debt ceiling is raised, then forget QE tapering, more QE will follow!
Republicans are fighting Democrats but remember which party created the Housing Mortgage Credit Crisis?
George Bush Jr + Allan Greenspan

The 2nd term of a US President has almost always been a disaster.

Germany: Merkel's key ally for Euro-bailouts has been ousted. The SPD whilst not anti-bailouts, is not pro-bailouts either. They want benefits of Euro bailouts to benefit common German people. This is a real problem in Germany because although the DAX is roaring, Germany's pro-Euro policy has helped German businesses and politicians. The common man is still struggling. Don't read too much into the fact that Merkel is coming back to power and she says that her Euro policy will continue as usual. With the new coalation partner and more resistance from Finland, Germany will pull the plug sooner than later on Euro-bailouts. The political landscape in Germany has changed drastically. We will see the results of the same in the next 6 weeks or so. The 3rd term for a German Chancellor has always been a disaster.

UK: Everybody is worried about the housing market bubble as jobs have not picked up. This entirely is the result of BoE 'Funding For Lending' QE policy. They have elections lined up in end 2014 or early 2015. So the bubble will continue but stocks will be under pressure as we run up close to the elections. (And remember that these are not new housing starts but erstwhile distressed properties that are being acquired)

Gold / Silver: They seem to have found their bottoms in dollar terms and will eventually turn up generating about 10% returns per annum

Crude: One fall towards USD 65-70 per barrel pending but prices will hover around the USD 100 per barrel mark with so much of QE happening all over.

Just a last note on Nifty; just as it happened in 2009, it will ignore bad news from the West and continue to soar higher. Expecting bumper new highs by Diwali 2014 on Sensex, Nifty, Gold, Silver et al

Yours Sincerely...........................Short-Term Bearish Long-Term Bullish Indian Analyst

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!