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.