Tuesday, June 3, 2008

The Fundamentals of Technicals

Dear Friends,

Today I am posting this after pondering over a few things. The different feature of this post is I am not referencing to any chart, not because I have lost my charm with them Smile but because for the kind of talk I'm going to discuss here, there will be no requirement for charts.

The first thing I should do is disclaimer : I request all to read my post just as an ANALYSIS and not as a CALL. I reiterate again that I do not find myself in the position or capacity to give any trading call. Anybody who wants to trade based on my views, should definitely refer to some expert professional advice.

Now, I think I should come to the point immediately, without wasting time and words. Following are the issues I thought about and tried to dissect :

The Unnerving Expiry on May 29

We all know what happened in the month of May. It was a very eventful month despite Nifty trading in a range. The month witnessed a starting with a TOP formation, after a very good going up trend, which started from the bottom made on 18th Mar at 4668 thereabout. Most people were bullish for the month, not only for Nifty but most of the markets globally. The downside that started on 2nd May looked kinda normal as a retracement was due for the upmove. The downtrend continued, but what was promising for the bulls were two things - 1. The uptrend line was intact and 2. more and more puts were written of 5000 strike. These two things almost ensured traders that the settlement will be near 5000, if not above it. What followed was mainly attributed to the rise of crude prices to record highs and not showing any signs of cooling off. On may 12 when Nifty bounced back from the uptrend line, traders were happy to open long positions and seek targets of 5300 - 5400, myself included. However, another downtrend started on 20th May which broke the important uptrend line and there was a sense of despair among bulls. Although the sentiment was hurt, still many were hoping 5000 as it was a good put support. Then came the day of expiry with hopes still on 5000 but surprisingly, despite having been a good and hopeful session in the morning and before noon, markets started to tumble. Most people kept their hopes including me, that Nifty should close near 5000 but all hopes shattered as time passed and finally it closed below 4850 !!! a good 150+ points below the so called support !!!

Now what surprised me was that during the entire day, there was no weak clues from global markets, nor there was any bad news although there were some talks about fuel price hike etc.

Well, it signalled something was cooking in there, but alas, only few could guess that. I was expecting a bounce before any further selloff, and next day we did see a bounce but only for that day, which again could not materialize into something bankable. In technical jargon, Nifty made a Bearish Engulfing on thursday and an Inside Day on friday.

On monday, after a promising start for bulls, the Nifty started cracking and broke many supports during the day finally closing at the low at more than 2% down. This has turned even hard core bulls into bears and why not? when you see supports getting broken like that. There were many rumours passing, the biggest of them being a support withdrawal by Left to the UPA government on fuel price hike. No rumour proved to be true so far when I'm writing this, but one thing is certain - The Indian Stock Markets are looking very weak and vulnerable. In order to catch the uptrend, it has to go a long way now. The weakness in Rupee has been continuing with some rare strong days, which is evident of foreign money getting out from India. Inflation is not showing any signs of cooling down and is threatening to move to double digits. The government is in a catch 22 situation as it is helpless and can't do much to contain inflation.

I salute Mr C T Rameshraja of icharts.com for his call on going short on the past Thursday. I still remember his logic that for some consecutive weeks, markets have shrugged off inflation nos, but this time it can be the other way.

The Ever Rising Crude Oil

What most people are worried throughout the world is rising crude oil price. It is making new highs and not showing any signs of cooling off significantly. When crude oil touched USD 135, there was a kind of panic globally. There are many schools of thought regarding the reason behind high crude prices. Interestingly, crude is looking the most precious thing in the world over.

Some analysts have concluded that crude is rising on mere speculation which is largely based on worries on supply and continuing demand by developing countries, China leading the race. They say the speculators are creating a bubble which is inflating and is very soon going to be ripe for a burst when the high price will act as a deterrent for growth and the spiraling price move will fall off the skies. In a newsletter by a US economist, I read there are reports of Oil Vessels just lying idle in high seas paying as high as USD 175,000 per day as charges. Now this if true, will lead to a larger than expected fall when the bubble (if it really is) is burst.

Other analysts have gathered some intelligence information and are almost sure there is going to be a conflict in middle east involving Lebanon, Israel and possibly Iran, not to mention US. If this is true then I don't think there will be any respite from it and instead it might skyrocket.

Well, I went through all these to come to one conclusion :

We are in a real dangerous situation. This is not to create panic but just an expression of the severity of the situation. However, the doors of hope are always open and any one big enough fold in circumstances can change the situation around.

I wanted to throw some light on few other things but given the length of text I have already put here, it is better to leave it here Very Happy

I sincerely hope you all went through it and will post your responses and comments or brickbats Very Happy

Thanks & Best Regards

Harish Dobhal

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