Nifty is in Up Trend .
We had expected a euphoric reaction on Monday morning but the 20 per cent surge in Nifty was just a little short of hysteric. Once sanity was restored in large-cap stocks, the frenzy shifted to mid and small-cap stocks. Record turnover was witnessed in both cash as well as derivative segment on Tuesday when market participants were able to execute trades. Massive FII inflows only fanned the buying ardour as they pumped in over $1 billion on Tuesday alone.
Momentum indicators in the weekly chart are extremely overbought. The 10-week Rate of Change oscillator is currently at a level not attained in the last 10 years. The 14-week Relative Strength Index is at a level last seen in the last quarter of 2007. The inference is that Sensex is overbought from a medium-term perspective. The long-term oscillators are however just approaching the bullish zone indicating that the long-term trend continues to be down.
We had expected the rally from 8047 low to halt below 13200 but the index moved beyond our outer target of 14500 to an intra-week peak of 14930 on Tuesday. The question that is frequently asked these days is if this is still a bear market rally or the resumption of the long-term bull market. We maintain that the rally from March 2009 low is a counter-trend rally or the B wave in a bear market. Counter-trend rallies retracing 50, 55 or 61.8 per cent of prior down-move is quite common. This view will be revised only on a strong close above 16000.
The other question that is frequently asked is – will the Sensex decline to March 2009 lows again? The next leg down or the C wave would have been ferocious had the Sensex been unable to move beyond 13200; a move below 8000 was a strong possibility then. But thanks to the exuberant reaction to the election verdict, the strength of the next wave down can be greatly diluted and the index can halt around or even above the March lows.
The point that gives rise to optimism is the fact that given the magnitude of the decline from 21206 peak (64 per cent), bulls have managed a rally that retraced more than 38.2 per cent. This implies that the bear stranglehold has eased substantially and bulls have the opportunity to wrench the controls from here.
As we have been reiterating over the past month, the medium-term trend continues to be up and it will be perilous to initiate trades against this trend unless clear signals are received about a trend reversal. A close below 12173, the floor of the gap formed last Monday, would be the first requisite to signal a medium-term trend reversal. The long-term 200-day moving average at 11,000 would be the next medium-term support level. If Sensex holds above 13500, next medium term target would be 16200.
The wave counts of the move from 8047 low that had been unresolved up to now have become fairly clear after last week's move. A 5-3-5 zigzag is apparent now with the third of the c wave completing last week. The index can move in a range between 13300 and 15700 for a few more sessions before this formation ends.
Volatility is expected to be high next week as the May derivative contracts move towards expiry. The ceiling of the gap formed last Monday at 13480 would be the support to watch in the near term. Subsequent supports are at 13300 and 12900. Upper targets for the week are 14547, 14930 and 15127.
Immediate supports in the week ahead are at 4140 and 3900. Upper targets for the short-term are 4428, 4500 and 4597.
CBOE volatility index declined to pre-Lehman-collapse level of 26.5 reflecting the rising level of complacency among investors.
The Dow is moving in the range between 8250 and 8650 since the first week of May in what appears to be a halt before the next leg of the medium term uptrend unfolds to take the index to 9000 or 9500. As indicated earlier, the index needs to close below 7750 to mitigate the positive medium term view.
Sri Lankan equities too surged higher and the Sri Lanka All Share Index gained 12 per cent with the resolution of the ethnic issue dogging the nation.
Commodities driven Latam markets had a stellar run last week; stock markets in Argentina, Mexico, Chile and Brazil closed with strong gains. —
The short-term trend in the stock is down. Supports for the week ahead would be at Rs 940 and Rs 865. Short-term investors can buy on a reversal above the first support. Resistances for the week would be Rs 1,060 and Rs 1,100.
The short-term trend in the stock is down but the gap between Rs 1,960 and Rs 2,100 formed on Monday morning will provide support. Stop-loss for trading longs can be at Rs 2,080. Resistances for the week ahead would be at Rs 2,248 and Rs 2,340.
The short-term trend in Infosys is however down. There can be a pull-back to Rs 1,570 or Rs 1,620 in the days ahead. Downward reversal below the second resistance would be a cue for traders to initiate fresh short trades with a stop at Rs 1,660.
If this is third leg of the up-move from the March trough, the targets can be Rs 1,686 and Rs 1,970.
Key intermediate term resistance for the stock is at Rs 1,827 that coincides with the May 2008 peak and January 2008 trough.
Fresh purchases are therefore advised only on a firm close above Rs 1,827.
Key medium term support is at Rs 1,480.
The stock can move sideways in the range between Rs 1,600 and Rs 1,900 over the short-term. Short-term traders can buy in declines as long the lower boundary holds. Target above Rs 1,900 is Rs 1,970.
ONGC 
We had expected the rally from January low in ONGC to halt around Rs 900 (38.2 per cent retracement of the previous down-move). But last week's blitzkrieg has taken the heavy-weight to Rs 1,100 that is 61.8 per cent retracement of the slide from November 2007 peak. Needless to add that the stock attained key intermediate term target last week and the rally from Rs 614 can halt here. Conversely, a strong close above Rs 1,100 will take the stock towards its all-time high once more.
The stock can correct to Rs 985 or even Rs 915 in the week ahead. Fresh shorts should be avoided on a close below the first support. Resistances would be at Rs 1,100 and Rs 1,210. — Lokeshwarri S.K.
The stock has moved firmly beyond the long-term 200-day moving average at Rs 324 and the medium term outlook will be roiled only on a firm close below this support.
A strong break-out beyond Rs 378 will take the stock to the next medium term targets of Rs 457 or Rs 487.
The near-term trend in Tata Steel too remains positive. Short-term supports for the stock are Rs 323 and Rs 305. Traders can buy in declines as long as it holds above the first support.
Short-term targets are Rs 387 and Rs 422.
Even index options did not reflect their intrinsic value during the week. For instance, the 3700 Nifty call was quoting at around 550, even when the spot price was hovering around 4350. (Option price = intrinsic value+time value). Here the intrinsic value is 650 (4350-3700). This is because index options are American, and are exercisable only on the expiry day. As traders fear the price could fall, they kept the intrinsic value lower. Stock options are European and are exercisable any time, that is why no options were available near the spot price. This explains the predicament of writers.
Traders can consider the following strategies.
Consider going short on Nifty future keeping the stop-loss at 4425. Traders could book profit at 4050 and then at 3630. Since this week is settlement week for the May series, intra-day volatility would be quite high. So this strategy is for traders who have a big risk appetite. Traders could also consider buying the Nifty June 4000 put, which ended at Rs 98.45 on Friday.
FII DATA 22-May-2009
| DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores) | ||||
| Category | Date | Buy Value | Sell Value | Net Value |
| DII | 22-May-2009 | 1420.21 | 985.68 | +434.53 |
 | 4238.50 | ( 0.66 %) | 27.60 |  |
| 1 | 2 | 3 | ||
| Resistance | 4273.38 | 4308.27 | 4367.03 | |
| Support | 4179.73 | 4120.97 | 4086.08 | |
 | 13887.15 | ( 1.10 %) | 150.61 | | |
| 1 | 2 | 3 | |||
| Resistance | 14012.29 | 14137.42 | 14337.92 | ||
| Support | 13686.66 | 13486.16 | 13361.03 | ||
A trailing stop-loss makes sure that you let the market decide when the money you made is enough.
"Too much too soon" is the view that majority of stock market participants hold on the recent market rally, having been left out of most of it.
Not many of us would have expected, even in our wildest imagination, that the markets would post a increment of over 50 per cent at the fastest pace in five years.That leaves us with questions — Have the markets overdone it? Is there more to come? And, most important, how do I harness this speedy bull?
The situation becomes really sticky when you have an unprecedented rally that now appears to have enough headroom to get an extension. Some traders may have remained on the sidelines throughout this rally. Others may have invested at one point in the rally and get out at the perceived optimum level, losing the opportunity to capitalise on the rest of it. The solution to reduce such anxiety and to make the best of a rally lies in the mechanism called trailing stop loss. Let's understand what it is and how it works.
A prudent investor then gets out once the perceived price objective is achieved, losing a chance to make any money out of gains over and above his target. Now the question is how high to set the target?
The answer lies in tweaking the argument a little by selling at a trailing stop loss, rather than at a target price. The idea is to raise the exit barrier in the direction of trade instead of setting an absolute limit on the rise. One of the major benefits in keeping a trailing stop loss mechanism is that as you near the target the stop-loss is revised upwards, locking in profits at the escalated stop loss level.
There are many benefits of this little alteration to a selling strategy. Many a time a sharp rise in a stock will be punctuated by minor corrections, that lead to enough nervousness to induce an exit.
Keeping a trailing stop loss takes care of this nervousness. By compromising a fraction of profits one creates an opportunity to make as much money as the market allows him to make.
Let's say one initiated a trading buy with a stop loss of 8,300 for a target of 9,000 when the Sensex was trading at 8,450. In the penultimate week of March, the Sensex realised the target. While a target seller would have exited the position, a trailing stop-loss follower would have raised the stop loss to 8,600 then.
The Sensex moved at an even faster pace, raising a trailing stop loss to 9,000, 9,300 and 9,700, which finally got hit realising 700 points more than the original price objective of 9,000.
A similar example can be cited from the current move in April where, had one used a target-based selling strategy, one would have achieved the target and missed out on an extended rally. A trader using a trailing stop loss would still be hanging on to trading buy waiting for newer highs to be conquered.
Moral of the story, let the market decide when the money you made is enough.
--
Arvind Parekh
+ 91 98432 32381
