Tuesday, December 16, 2008

Indian Markets Not BOTTOMED yet - Bigger Troubles Ahead

My today's post is not for traders but merely a fundamental coverage of "current monetary and fiscal drama" played by Indian counterparts of Bush, Bernake, Paulson etc. Led by Mr. Manmohan Singh, who was the one responsible for changing the course of Indian Financial Picture when he was Finance Minister in Rao's govt. He is a person who will remembered in history for his GREAT victory over conservationists in 1990s and equally his worst MISHANDLE of economy in 2008.

The govt announced a "package" to reinvigorate Indian economy and this package contained various different magical elements resembling more like a kaleidoscope that is handed to children to make them forget "real things".

I will come to the various elements of this package and present my arguments in favour / against them.

First, the "package" contains following items:
  1. An across-the-board four per cent cut in CENVAT
  2. Plan to invest Rs. 20,000 Crore in infrastructure development
  3. (Not in strict terms, but more or less so) FORCING nationalized banks to provide cheap loans (paticularly home loans) at below their cost of funds rates.
Well, these things were factored in at least a week earlier by markets and most people on streets looked happy. The rumour was there would be a 7.5% interest home loan on loans upto Rs. 5 Lakhs but yesterday the news came out and it was decided at 8.5%.

Now let me come to my arguments. First of all this Keynisian theory is dangerously flawed and disasterous in the long run that govt should run surpluses in boom times and deficits in sluggish times. I believe in true free markets and govt should only monitor rule of law. Yes I am one of those economist Mr. Hayek's fans. Let me come straight to my arguments regarding "package" contents.
  1. The across-the-board cut in CENVAT is good action considering there can not be many who can afford to pay high taxes during slowdown and indirect taxes count a lot when prices are concerned. But, that also means a lesser amount of revenue for govt which leads to increasing deficit. Some will argue that this cut in CENVAT will result in price cuts (in fact there are already price cuts in various goods like cars) which will fill the gap of lower CENVAT amount by increasing volume of sales. This looks good in theory but practically this is very flawed theory. The natural "correction" in prices of commodities that would already result in lower consumer goods prices is now being maintained artificially - which means REINFLATING the obscene commodities bubble. I give an example here - let us say the cars were costlier because of higher input costs resulting from high prices of various raw materials like steel and other metals. The natural deflationary cycle would have dealt with this menace on its own by lowered prices which the car companies would pass on to customers. One more advantage of this would be in environmental terms as lesser number of new vehicles sold would mean at least some relief for some time from greenhouse gases.
  2. The next element of the "package" is fiscal stimulous of Rs. 20000 Cr on infrastructure expenses by govt. As I have already said, this is very good thing as India needs a lot of infrastructure development. But, once again the question is where will the money come from? In times of already alarming fiscal dificit it is a real hard question.
  3. The next thing is "forcing" the nationalized banks to cut interest rates. While this looks good for common man as the policy targets loans upto Rs. 20 Lakhs only, the problem is again the viability of such a move. Why can't govt wait for the course of deflationary cycle and preserve its ammunition for more difficult times? What will happen when they reach a situation of high deflation and no scope for rate cuts? That will be disastrous. The banks are said to be very unhappy at this forced duty and they will ask for govt to subsidize these loans. Once again, where the govt will get this extra money?
As you can see, the main problem I see with the "package" is where the govt is going to get this much of money? Remember Farmer's loan waiver? Remember sixth pay commission burden? The govt is already stretched to its limits in terms of funds availability and yet they are going for such "fiscal stimulus".

Although what Indian govt is doing is not even a drop in ocean if compared to what US govt has already done, the difference has to learnt though. Emerging economies don't have the luxury of running big deficits as they have to also consider their currency degradation and devaluation. India, like other emerging economies, needs to rely more on its forex reserves than on external borrowings. Indian govt bonds will not be bought by one and all like that of US are being bought today. Moreover, a destabilized currency will only inflate prices resulting in very complicated monetary situation where the central bank (RBI) will find itself in very difficult position and even HYPERINFLATION (remember Zimbabve?) is a good possibility.

Based on the above I think Indian markets at least haven't bottomed out yet and a fresh new downward spiral may be just around the corner. Being an Indian I pray for being proved wrong.

Friday, December 12, 2008

S&P 500 US - Support Broken

The S&P 500 index of US is what I think is benchmark for US stock markets as a whole (I rarely look at Dow Jones). In my previous post about S&P 500 Future I told how precariously it was placed and any was expecting some good move either side (though my bet was on short side). The reason was it was facing big trend line resistance and yesterday the resistance proved to be bigger than bulls were thinking.

Before today's markets open, S&P 500 future was down sharply below 840 but has recovered to 851 in less than five minutes. Yesterday it broke below 840 and in the process short term uptrend line got broken. In fact, this must be a real bad news for bulls. This broken uptrend line should act as another resistance now, however, given the recent volatility, I would not act in haste.
If we consider this formation as a triangle kind of thing, then the break of support may prove to be a continuation of primary bear trend.

Wednesday, December 10, 2008

S&P 500 Future Analysis based on Daily Chart

I am posting my analysis of S&P 500 (US) after some good gap, the reason was I found it too volatile to look. Today, I can't hold my excitement after what I found on charts, so, here is my view looking at Daily Chart of S&P 500 Future:

If we join the highs of 14th Oct and 5th Nov and extend it, there is a clear down trend line. Yesterday and the Day before yesterday, S&P 500 Future clearly got good resistance there and even today (at the time of writing this post, US Markets are open), also it looks like acting as resistance.

The support line that is being shown on the chart meets the above mentioned down trend line at about 893 and it is going to be interesting going forward. Such situations are always exciting.

To add to this excitement is Fibonacci 61.8% retracement of the down move from 5th Nov high to 21st Nov low is also near, not taken out on a closing basis so far.

Given the volatility, I would refrain from entering S&P 500 at this time, but if I need to make a choice, I would go for a short here as trend line resistance is acting big and risk - reward ratio is in favour of short.

Happy Trading

Nifty Future Analysis based on Hourly Chart

Indian Markets closed up today following global cues. Nifty Future broke an important trend line upwards and it looks like bulls want to charge through.
Here is my analysis of Nifty Future based on Hourly Chart:

Looking at the above chart, I have following to say:

  1. The Downtrend Line that was acting as good resistance so far was conquered yesterday and acted as support after that.
  2. The uptrend line that was broken few days back, can act as resistance now (look at today's close). Nifty Future could not manage to close above it today.
  3. The Fibonacci resistance of 61.8% retracement of previous fall was also taken out today by strong looking bulls.
  4. EMA sequence is looking mixed with Nifty Future closing above 200 SMA and 34 EMA above 55 EMA. Also, these three MAs are closer and a big move either side can be expected.
The above points clearly show that now bulls have upper hand. If Nifty future manages to get past the previous (broken) uptrend line, there can be some good upside. Bulls need to use full force to get past this area. Having said this, we should keep in mind that still the primary trend (intermediate) is bearish and this upmove may be only for short term.

Thursday, December 4, 2008

Nifty Future Analysis Based on Hourly Chart

Here is the Nifty Future Hourly Chart as on the close of 4th Dec, 2008. Looking at the chart, I have following observation:
Although many people are bullsih seeing the impressive upmove of Indian Stock Markets, I have some different view. The Hourly Chart shows a Downtrend Line and an Uptrend Line (which was breached decisively on 1st Dec and also the 200 Period SMA is coincidentally nearby.
  1. This uptrend line (and the accompanied rise) resembles more to a bearish rising wedge / channel , than a genuine, sustainable up move. In my previous post on Dec 1st, I expected resistance then and advised to initiate a short at near 2890, which was not reached. Considering Nifty Future has broken the rising wedge support (uptrend line), now that line should act as resistance.
  2. The two lines converge at about 2819 which should be big resistance now. So, bulls need to take this level with full force to counter bears and then try to conquer 2920 which is not very easy.
  3. The slow stochastic oscillator also signals a short term top, however, I still maintain my view that oscillators should not be given high importance in trending markets.
Looking at the picture, contrary to popular thinking, bears still have bigger hand as compared to bulls.

Monday, December 1, 2008

US Going to Break Down? Already Bankrupt?

Friends, esp those from the US of A, though I am not a US citizen, I am a big fan of AMERICA in many ways. America (USA) is not a country - its an IDEA. An idea of freedom, multiculturalism and law and order. It has entire world's 40% scientific power. It is the only nation in world which is actively trying to save the planet from some possible asteroid strike. Its the only place in the world which is more a dream than a geographical/political place.

Having said the above, I am concerned about the possible collapse of USA financially and politically. Surprising? well, its both surprising and painful to even think in this line but our emotions alone can not change the course of events and what looks like imminent is that USA is on the verge of collapse.

The talk about monstrous US national debt and possible end of dollar based world economy is not new. I told that long back in this post. What is worse is the political deterioration as lawmakers and policymakers in USA seem to be not caring for the facts and only trying to hide recent mistakes (recent means past half century) in the worst possible way. One of the biggest mistake was fiat money regime in 1971 when currency (dollar) was untied to gold. They did that to hide the problems their poor handling of economy created then. So far US has survived so many recessions, stagflations but this time it is VERY DIFFERENT. Different even from The Great Depression. This can be very well the end of FIAT MONEY and dollar based system. The Kondrateif Cycle Winter is on cards (which was postponed in 1990s). If things go as they are going now, then the economic collapse is not far away. If the politicians and policymakers continue to repeat same mistakes(for example trying to fix the bubble burst with reinflating it!!!) then even political collapse is nearer.

The collapse of an empire is not new as history shows that even the best of empires ultimately collapsed (remember Romans? OR quite recent USSR?). So a collapse is not surprising but what is painful is the way it is approaching fast. As Dimitry Orlov put all this in his article on Energy Bulletin website uner the following heading:

Closing the 'Collapse Gap': the USSR was better prepared for collapse than the US

the painful thing is if USA is nearing collapse, it is far worse prepared for it than the former USSR. Already there are warning signs like increasing poverty spreading toward suburbs, which indicates the situation on ground is becoming dangerous every passing day.

I am deeply concerned with these developments as I will also be one of those indirectly but deeply affected by such events. Let us hope somehow this possible collapse be diverted but hopes are not the best solutions.

Nifty Future Analysis based on Hourly Chart

Friends, first my apologies for not posting for several days. My schedule was unexpectedly changed and I had to stay away from markets.

Looking at the Hourly Chart of Nifty Future (at the time of writing this post Indian markets are open) I find the following:

  1. Nifty Future is very short term uptrend but short term downtrend as seen by the EMA sequence on hourly - 5 EMA(gray curved line) above 13 EMA(green curved line) and both above 55 EMA(blue curved line) BUT 34 EMA(red curved line) still below 55 EMA.
  2. The trend line joining high of 4th Nov and 9th Nov when extended, is near 200 SMA on hourly chart, which means the range from 2890 to 2920 should prove to be a big resistance.
  3. The Fibonacci retracement of 61.8% of the fall from 4th Nov high to 20th Nov low comes at 2914, coincidentally near the above point and in the resistance region.
The above observation clearly states that I expect a good resistance at the current levels(2820) through 2920. If Nifty Future manages to get past 2920 with good volume then short term trend will change upwards and bears need to be cautious. I would like to initiate a short around 2890 (if it comes ) and strict Stop Loss at 2930.

Disclaimer: Trading in stock markets is full of risks and can lead to substantial losses. A professional advice before initiating any trade is highly recommended. Anyone acting on my suggestion should know that I will not be responsible for any loss.

If you have arrived here from a search result, please click here to see main page where you will find the latest post