Sensex on a slippery slope
Sensex (17,591.2)
Altercation between the stock market and insurance regulators on the ULIP issue made Sensex commence trading on the back-foot last week. High WPI inflation numbers further stoked the fear of an imminent policy rate hike sending the benchmark sharply lower on Thursday to end the week 2 per cent down. This is the first negative weekly close for the Sensex since the first week of February.
Heightened activity however continued in the lower-rung stocks and breadth remained good even on days when the benchmark declined. Volumes were subdued in the cash segment but higher in derivatives denoting higher trading interest. Low index put-call ratio however implies that market participants are expecting this correction to be short-lived one.
The coming week promises to be an eventful one for the market as stock prices react to earnings announcement from some of the front-line companies and the RBI's decision on policy rates. With the advent of volatility on the global front too, with SEC charging Goldman Sachs with fraud in mortgage-backed securities, the prop of a benign global environment is likely to be withdrawn in the near future.
The Sensex closed lower in all four sessions of last week, the longest losing streak since January. The 14-day relative strength index is positioned at 52 and the 10-day rate of change oscillator is at 0.35. Both these indicators imply that the index is at the risk of commencing a short-term downtrend but it has not done so yet. Last week's pullback has had no effect on the weekly oscillators yet. They are still displaying a positive bias.
The movement of the Sensex last week confirms our count of a diagonal triangle in the fifth wave from 15,651 low. The current correction could then be correcting the move from 15,651 to 18,048. The minimum targets for this decline would then be 17,328 and 17,130. Traders holding long positions should continue to do so only as long as the index trades above the second support.
Bounce from either of these levels can be followed by some sideways movement between 17,000 and 18,000 for a few more weeks. Such a movement in a higher trading band will leave open the room for another attempt to get to 18,200 or 18,500. Decline below 17,000 will bring the support at the 200-day moving average at 16,400 and retracement support at 16,500 in to reckoning. These supports need to be breached to indicate that the index is heading towards the lower end of its current medium-term trading band at 15,500.
The Sensex could decline to the targets of 17,328 or 17,130 indicated above, in the week ahead. Rebound from either of these levels would imply that bulls are still in control and can pull the index higher to 17,700 or 18,000 once again. Supports below 17,130 are 16,840 and 16,575.
The Nifty (5,262.6) reversed lower from the intra-week peak of 5,382 to close almost 2 per cent lower. If this decline is correcting the entire up-move from 4,675 low, downward targets are 5,182 and 5,123. Traders holding short positions should watch out for rebounds from either of these levels. Long positions also can be held as long as the index trades above the second support. Decline below 5,123 will drag the index to 5,040 or 4,950.
The 200-day moving average at 4,890 will also be a good support in the event of a strong decline. Close below 4,890 is required to signal an impending move towards the lower end of the current trading range at 4,700.
Resistances for the upcoming sessions are at 5,345 and 5,400. Traders can hold their shorts with stop at 5,350.
Global Cues
Most global indices declined towards the end of the week to close on a negative note. The CBOE VIX soared higher on Friday as Goldman Sachs' misdoings became known.
This index recorded one of its sharpest daily gains in recent times in that session to close at 18.3.
The Dow recorded the high of 11,154 during the week before reversing lower on Friday. An evening star pattern is apparent in the daily candlestick chart that is a top reversal pattern but this down-move needs to sustain for a week more before it morphs in to a medium-term down trend.
Immediate supports for the index are at 10,970 and 10,850. Short-term view will turn negative on a close below the second support.
Pivotals
Reliance Industries (Rs 1,083.3)
RIL followed our script closely last week, reversing below the short-term resistance at Rs 1,143 to move to the first target at Rs 1,090. Sell signal in the daily moving average convergence divergence oscillator and reversals in the 10-day rate of change oscillator imply that the stock is in a short-term downtrend. The stock has strong support around current levels. Traders can initiate fresh short positions if it trades below Rs 1,090 in the initial part of next week. Subsequent downward targets are Rs 1,067 and Rs 1,042. Short-term resistances are at Rs 1,121 and Rs 1,140.
As explained last week, the stock is moving in a sideways range over the medium-term. Therefore, reversal from the upper boundary at Rs 1,155 denotes that a move towards Rs 1,040 or Rs 966 is possible in this time-frame.
State Bank of India (Rs 2, 046.8)
State Bank of India was unable to move past the resistance at Rs 2,130 and declined past our first short-term target to the intra-week low of Rs 2,026. The medium-term trend in this stock is down since the October 2009 peak of Rs 2,500. If the third leg of this down-move commenced from the recent peak formed on April 6, this move has the minimum targets of Rs 1,860 and Rs 1,750.
If we consider the retracement of the intermediate-term up-move in this stock from the March 2009 low, 38.2 per cent retracement occurs at Rs 1,900. The stock could therefore try to stabilise in the band between Rs 1,850 and Rs 1,900 even if a sharp correction ensures.
Key short-term support for the stock is at Rs 2,000 where the 50-day moving average is also positioned. Traders can therefore watch out for sudden reversals from this area. Resistances are at Rs 2,090 and Rs 2,112.
Tata Steel (Rs 694.4)
Tata Steel inched higher in the first three sessions of the week before it turned volatile on Friday. But this stock bucked the trend in the broader market to end the week slightly higher. The sideways move however maintains status quo on both our short as well as medium-term view. If the stock sustains above the intermediate-term resistance level at Rs 660, it can head towards its former peak at Rs 970 over the medium-term. However, reversal from these levels can cause a decline to Rs 470 and some more range-bound movement over the medium-term.
Short-term supports stay at Rs 650 and Rs 627 and traders can exit their long positions on a decline below the first support.
Infosys (Rs 2,785.8)
Infosys did a volte face last week, negating the emerging down-trend to rally to a new high of Rs 2,823.80. The doji star formed on Thursday and the subsequent bearish candle denote that the stock could struggle to move past Rs 2,820 and can decline towards Rs 2,728 or Rs 2,700 in the days ahead. Traders can hold their long positions with stop at Rs 2,720. If this level holds, a rally to Rs 2,890 is possible in the near-term.
The medium-term uptrend in this stock continues to be very strong. We stick with the view that a close below Rs 2,300 is required to negate this view. Investors can therefore continue to hold the stock as long as it trades above this level.
Sizzling stocks
Blue Dart Express (Rs 950.7) This stock darted higher on Thursday as robust first quarter earnings pushed made it close 20 per cent higher. There was no let-up in the bullish momentum in the next session either and the company went on to record the high of Rs 1,045 on Friday before retracting slightly to close the week 25 per cent higher.
The stock is in a strong structural uptrend since April 2003. One leg of this uptrend ended in April 2006 and the stock was moving in a wide trading band between Rs 400 and Rs 750 over the last four years. Blue Dart Express made multiple attempts to move above the upper boundary of this range over the last two years. It finally accomplished this feat last week. Simple 1:1 extrapolation of the move from 2003 gives us the target of Rs 1,100. Since the stock has moved close to this level already, a pullback to Rs 800 or Rs 750 is possible again. Short-term investors can therefore book some profits on failure to move past Rs 1,100. Stop-loss for short-term investors can be at Rs 920.
That said if the stock sustains above Rs 800, it can move on to Rs 1,535 over the long-term. Investors with long-term investment perspective can hold the stock as long as it holds above Rs 750.
Balaji Telefilms (Rs 62.9)
Balaji Telefilms dazzled market participants in the first half of the trading week, recording 34 per cent gain in just two trading sessions. It gave up some gains in the subsequent sessions to end the week with a more modest 19 per cent gain. This stock continues in the throes of a strong bear market and has a long way to go before it can begin a sustainable up-move. Close above Rs 78 would be the first signal that the medium-term trend in the stock is reversing higher.
However, the stock has strong medium-term support around Rs 45. Since it is currently consolidating in a wide band between Rs 50 and Rs 75 since last June, it can move higher to Rs 100 or Rs 120 over the next two years.
Investors can therefore hold the stock with stop at Rs 44.
Near-term resistances for the stock are at Rs 70 and Rs 78. Since the stock is reversing lower from the first resistance, short-term investors can exit their holding. Key short-term support is at Rs 59.
Initiate bear put spread on Nifty
Traders can set a bear put spread for the week, as there is a strong resistance for Nifty beyond 5,345.
We suggest traders to set a bear put spread for the week, as there is a strong resistance for Nifty beyond 5,345. Setting a put spread therefore may help traders benefit from any weakness in the index. You can set it by buying Nifty April 5,300 put option and simultaneously selling Nifty April 5,200 put.
This would result in a net initial debit, as you will have to shell out Rs 97 for buying Nifty April 5,300 put, while you will receive Rs 54 when you write Nifty April 5,200 put.
Overall, the spread will cost you Rs 43/share.
The initial debit, which is cost of setting the spread, would also be the maximum loss you can make.
Do note that you can time both the legs of the transaction depending on how the market opens on Monday.
The spread
Maximum profit potential: The maximum profit for this spread will occur when Nifty moves below the strike price of the sold option, i.e. 5,200 on expiry.
The maximum profit potential will be limited to the difference between the two strikes minus the net debit paid or the cost of setting the spread. In this case, the maximum profit will be Rs 57.
Maximum loss potential: When your spread is totally out of money i.e. when Nifty value is higher than the 5,300, the maximum loss that you can suffer will be limited to the net debit paid, Rs 43.
Overall, by setting the spread you would be taking a maximum risk of Rs 43 to earn a maximum profit of Rs 57.
Exit strategies
Volatile that markets are, it is advisable that you make an exit at the first profit opportunity itself, especially since the strategy affords only limited returns. Therefore, if the index appears to be trending down, you can consider a premature closure of the short option (provided price points are beneficial).
Alternately, you can also cut losses if the Nifty trends up beyond 5,345.
Consider shorting DLF, Neyveli Lignite
DLF (Rs 329.7): Despite the recent uptrend, the stock seems to have lost its momentum a bit, turning weak on Friday. We expect the stock to move in a narrow range with a negative bias. As long as it stays below Rs 405, the outlook for the stock remains negative. It currently faces an immediate resistance at Rs 340 and has a support at Rs 282. Only a break from this range could set a clear trend for the stock.
F&O pointers: DLF futures (market lot 800) added open interest on Friday. This presents a negative view, as it indicates creation of fresh short positions. Besides, accumulation in calls at strikes 340 and 320 indicates emergence of call writers. Put options shed open interest signalling covering activity by writers.
Strategy: Consider shorting DLF, with a stop-loss at Rs 340 for an initial target of Rs 320 and then Rs 292. Adjust the stop-loss progressively.
Neyveli Lignite Corporation (Rs 148.5): The stock has been moving in a narrow range of Rs 165 and Rs 140 since late January 2010. It now appears that the stock might be able to break this range, but on the down side. Neyveli Lignite finds a crucial resistance at Rs 163 and a support at Rs 144. A dip below Rs 144 can weaken the stock to Rs 125, though in between it may find minor support at Rs 136. Only a close above Rs 163 would change the view to positive. In that event, the stock could test this January peak of Rs 177..
F&O pointers: The Neyveli Lignite futures (market lot 1,475) added close to 3.5 per cent in open interest on Friday even as the counter fell by 4 per cent. Accumulation of open interest in falling market signals a weakening trend. The futures and the spot closed at same level of Rs 148.5. Options were not active enough.
Strategy: Consider going short in Neyveli Lignite if it dips below Rs 144 for an initial target of Rs 136.
Follow-up: We had advised traders to consider going short on Dr Reddy's Lab and CESC. Both the positions are currently in the money with decent profits. Hold them for one more week for the recommended targets.
Goldman fallout: No major impact seen on Indian market
India's stock markets are unlikely to be significantly impacted by the sharp fall in US and European markets on Friday following the US Securities and Exchanges Commission's decision to sue Goldman Sachs, according to brokers.
Though they expect some correction in the domestic markets on Monday, they rule out a repeat of what happened in September 2008 after the Lehman Brothers episode.
On Friday, the SEC sued Goldman Sachs on charges that the company and one of its Vice-Presidents defrauded investors by mis-stating and omitting key facts about a sub-prime-linked product that it was offering. The shares of Goldman Sachs dropped 16 per cent on Friday, which is the lowest it has fallen to in a year.
World markets were rattled by the news as the Dow, Nasdaq, FTSE, CAC and other major European markets were down more than one per cent on Friday.
Mr Deven Choksey, Managing Director at KRChoksey, said that foreign institutions will not liquidate their position as the development is unlikely to lead to an immediate liquidity crisis. They will not pull out money from Indian market, he said.
"The European markets are more connected to the American markets than our markets, which is why they reacted the way they did," said Mr Rakesh Goyal, Senior Vice-President at Bonanza Portfolio.
Some analysts feel a correction is needed in the Indian market, which has been moving in the same range for the past nine months. "It will be a meaningful correction as the next rally will be a stronger one. Along with the Goldman Sachs news, the RBI's monetary policy expectations could also have an impact on the market," said Mr Jagannadham Thunuguntla, equity head, SMC Capital. He added that in a bull market investors do not react much to bad news.
The Sensex on Friday closed 48 points lower at 17,591.
Metals, auto lead the bull charge
Topping the list with returns of over 300 per cent is the BSE Metals index, followed by auto, banking and consumer durables delivering 186-196 per cent gains.
Every rising phase in the stock market usually has new sectors leading the bull charge. The rally of the past one year too has thrown up its share of new sector leaders. Even as the Sensex itself more than doubled from its March 2009 low of 8160 points, it was the BSE sector indices for metals, auto, banking and consumer durables that have delivered big outperformance.
Topping the list with returns of over 300 per cent is the BSE Metals index, followed by auto, banking and consumer durables delivering 186-196 per cent gains. While the rebound in commodity prices has helped metal stocks, strong consumer demand drove good numbers for sectors ranging from auto, to consumer durables and banks. Green shoots in the US have pushed up the BSE IT index, a surprise outperformer.
The realty sector was a moderate performer with a 151 per cent gain. Though this segment is yet to see any dramatic turnaround in the earning, signs of revival in demand in the commercial and residential real-estate space has propped-up the stock prices in the recent times. Defensive sectors such as healthcare and FMCG which were in favour during the market downturn have registered relatively subdued gains in the last one year. Oil and power sectors too were underperformers in this period.
From Jan 2008 highs
Even after its climb, the Sensex is still down by 14 per cent compared with its January 2008 peak. However, there are a few sectors which have already soared past their January 2008 levels. Registering a 41 per cent gain over January 2008, BSE Auto leads the list of gainers.
Defensive pockets such as FMCG and healthcare, which weathered the 2008 fall well, are also above their earlier highs. However, sectors such as metals, banking and PSU are still 4-13 per cent below their January 2008 levels.
The once fancied realty sector, despite its recent gains, is one segment that has a long way to go to regain its position. The sector index is 75 per cent below its January 2008 levels and leads the list of underperformers. Other underperformers in this period include, power, consumer durables, capital goods and oil and gas. These sectors are trailing their 2008 levels by 25-35 per cent.
While the BSE Small-Cap index has outperformed the BSE Mid-Cap and the Sensex between March 2009 and March 2010, over a two-year span the Sensex still was the better bet for investors. Though the Sensex is down by 14 per cent when compared with the January 2008 levels, the Mid- and Small-Cap indices are way below by 28 and 33 per cent respectively.
Stock moves
Despite the positive picture presented by the Sensex gains, a good number of stocks are yet to recoup a substantial part of the ground they lost in the fall of 2008. Only 154 of the BSE 500 companies have bettered their January 2008 levels. Many stocks from the media, real-estate, retail, and financial services sectors are still much below the January 2008 prices.
For instance, stocks such as Reliance Media, TV 18 India, Suzlon Energy, Omaxe, Unitech, B L Kashyap, Indiabulls Real Estate, Provogue, Indiabulls Financials, Development Credit Bank, Edelweiss Capital, JM Financial, Parsvnath Developers, NDTV, HDIL, and Orbit Corporation are down from their January 2008 levels by 70-90 per cent.
Pivot Point Trading
Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to use pivot points.
The reason pivot points are so popular is that they are predictive as opposed to lagging. You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).
Because so many traders follow pivot points you will often find that the market reacts at these levels. This give you an opportunity to trade.
If you would rather work the pivot points out by yourself, the formula I use is below:
As you can see from the above formula, just by having the previous days high, low and close you eventually finish up with 7 points, 3 resistance levels, 3 support levels and the actual pivot point.
If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.
The three most important pivot points are R1, S1 and the actual pivot point.
The general idea behind trading pivot points are to look for a reversal or break of R1 or S1. By the time the market reaches R2,R3 or S2,S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.
The green line is the pivot point. The blue lines are resistance levels R1,R2 and R3. The red lines are support levels S1,S2 and S3.
There are loads of ways to trade this day using pivot points but I shall walk you through a few of them and discuss why some are good in certain situations and why some are bad.
We haven't even got into patterns around pivot levels or failures but that is not the point of this lesson. I just want to introduce another possible way for you to trade.
Markets, no matter in what they deal, exist to facilitate trade, nothing more, nothing less. As such prices will continually fluctuate between supply and demand to enhance the exchange process. The market abhors a stand off, it cannot exist in a state of paralysis. So market traders will constantly adjust bid and ask prices to keep the exchange going - a combination of a traditional auction to seek top prices, then switching to a Dutch auction to explore for a price bottom.
As prices continually rotate to enhance trading, prices of perceived value (support) and perceived over valuation (resistance) can be recognized by the volume of activity at different price levels. This is the basis of Market ProfileTM (MP) analysis. Distinct patterns of volume and price behaviour can be recognized using MP profiles.
MP illustrates that the majority of trading in a day is by floor traders or "locals" as they are called. These locals constantly take prices up and down to very short term levels of support and resistance, exploring the narrow limits of price/valuation tolerance. Trading for the day will persist between this narrow range unless "outside" buyers and sellers are attracted to the price changes that occur. If the narrow range of support or resistance established by the floor traders can be wrestled from them, then off floor short term traders will be attracted and enter the market, as buyers if short term resistance is overcome or as sellers if short term support is violated. These breakout points then usually reverse their function and serve as test points, i.e. previous resistance becomes support and previous support becomes resistance.
Now the active range of trading expands as the off floor traders enter the fray. If more longer established support and resistance can be successfully breached during the new short term trend that emerges, with the activity of the off floor traders, then longer term traders, position traders, with an intermediate or long term intention of their market commitment will be attracted to join the market.
If one knew the range parameters of support and resistance used by floor traders one would have a handle on the significant areas where off floor and possibly position traders may take over the market direction from the rotating locals. Well the locals calculate from the previous day's range the pivotal or inflexion price and the areas of support and resistance. The calculations are very simple and the results invariably have an influence on the market activity of the day. In fact, if no other information that relates to the market becomes available then the locals' parameters may dominate the day.
The calculation for the new day are calculated from the High (H), low (L) and close (C) of the previous day.
So unless significant market news has been made available between yesterday's close and today's opening you can expect locals to take prices to test the near term support and resistance and the pivot price. Should, for any reason, these near term support and resistance areas fail then the second such area will likely be tested. If these support or resistance areas fail, because of market influencing news or observations, the off floor or, more particularly, intermediate term positional players will likely enter the market and make the market trend.
So these floor trader pivot points are areas to be aware of and respect. They are both dangerous and areas of opportunity. Stop orders to enter at these points are readily whipsawed by 'floor sweeping' by the locals as they rotate up and down the perceived range. On the other hand, if you find support or resistance was forthcoming as appropriate it offers a low risk entry point with a close Stop loss point identified. On the other hand, failure of anticipated support and resistance, as appropriate, offers a low risk entry point with a close Stop loss point identified in what is likely to be a trend emerging from the 'local' noise of the market.
Even if you are not a day trader, knowing the key pivot, support and resistance points can help the short term off floor and intermediate positional trader to identify potential entry points and stop loss levels for your trade if your other criteria have determined the direction in which you should be trading.
Make it a daily ritual, calculate the pivot point and the areas of support and resistance after the close each day for the markets you are interested in. Study the next day's price action in the context of those pivot points so that you get familiar with the dynamics of the market.
Disclosure: I don't have any positions in the above said scrips & NIFTY FUTURES.
"I do not make any warranties, express or implied, as to results to be obtained from using the information in this e-letter. Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report."
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