Saturday, September 17, 2011

The Week That Defied The Weak

Dear Readers,

This past week was an amazing week in terms of fundamentals and market direction almost all over the globe. The news and fundamental data that drive traders and investors who decide their trading decisions mainly on these things were not very strong yet the markets managed to rally significantly! Let me outline briefly some facts of last week :

In the US there was increasing unemployment data, declining retail sales, record high poverty level and despite all that the markets were up significantly (Dow about 700 points).

In Europe we don't even bother to look at the details, the troubles are ubiquitous. In addition, there was another rogue trader scandal and open secret that Greece is on the brink of default which would trigger further trouble for European Union. Despite that the markets in most of Europe rallied substantially.

In India the inflation data, both monthly and weekly, attempted double digits, before Friday the RBI was supposed to hike rates again and on Friday it did do that. Auto sales are declining, IIP data suggesting substantial downturn and declining value of Rupee putting pressure on imports (particularly oil). Despite all these things, the markets rallied.

What does all this mean? I have always believed that fundamentals do not drive markets and its the mass psychology that does. There is only one thing that matters and that is liquidity. If traders and investors have money and are willing to buy, then all such bearish news and fundamentals have no power to stop them. Similar thing happens but on opposite way if traders and investors are pessimistic. Then even the best of the data is unable to make them buy. This is the reason I suggest looking at Technical Data rather than fundamental data for trading.

Wednesday, August 24, 2011

The Appealing Chart

Dear Readers,

Here is one interesting chart which in my opinion is appealing as it incorporates some data important for all technical traders. This is the long term monthly chart of Nifty (NSE Nifty 50) since 2002.
Nifty Monthly Chart from 2002 to Aug 2011 Log Scale

The chart shows us following things which can be the deciding factor for serious traders:

  • The trendline from 2008 low to the recent low of June 2011 was violated this month and Nifty is below that line for all of this month so far. 
  • This low also broke down below 50 SMA (monthly) but is just above that now.
  • This low is also near the support level of the low of May 2010.
  • The RSI is trending down and has broken down the 50 level. This breach of 50 level was not seen anywhere since the 'recovery' started in late 2008.
  • The MACD on this monthly chart had already given sell signal in Feb-March this year. Kindly note that MACD signal on monthly charts is very reliable as seen in the past.
So, the market is at some important price point and case for bulls and bears is 40:60 respectively. The close of this month is going to be important for bulls as bears are having upper hand so far. The problem bears encounter is lack of volume at such an important point but then the month has several trading days ahead for one thing and for another thing, volume is not 'extremely' important for bears as stocks can fall off their own weight.

The long term trendline from late 2003 low, joining late 2008 low and extended, gives an idea that next support (if bears have an upper hand) is going to be near 3800 on Nifty which looks yummy to bears but scary to bulls.

There is one more thing that needs attention although some of you might discard it as trivial but in my opinion this is important. RIL (Reliance Industries Limited) has been the king of this market since the start. Note that RIL started going down first and then the rest of the market followed suit. Also, RIL lost its 'most valued firm' status last week (although briefly) which symbolically looks important.

The bottomline is:

At this point there may be people buying, but if Nifty continues going down from here, then there is the possibility that we may see even 3800 ish level on Nifty.

Happy Trading...

Friday, March 18, 2011

Japan Earthquake and Its Possible Implications

Dear Readers,

I haven't posted here for long owing to my personal busy schedule which kept me away from stock markets and related events. Last week there was a magnitude 9 earthquake in Japan and Nikkei, Japan's stock market index, plummeted heavily after there were reports of possible meltdown and even possible 'criticality' of Japanese nuclear reactors. What it means is if the crisis goes out of control, there are chances of extreme radioactive pollution whose effect will not be limited to Japan and even Hawaii islands of US may feel the heat. I hope the situation does not go that far away  and all becomes well for Japanese people sooner.

On the developments in Japan almost all Asian markets reacted, some mildly down to some even positive (Indian markets). Most analysts talked about Japan's economy in real trouble with GDP falling etc etc. I agree with the loss of economy and its impact on GDP of Japan but I think this probably is the end of Japan's two decades long problem, economically.

Japan was struggling with deflation despite zero interest policy of Japanese Central Bank. Even Japan's Debt to GDP ratio had gone high up owing to the soft monetary policy. Whatever analysts think, I have this belief that some kind of destruction (Shumpeter's Creative Destruction) was necessary for Japan and that was being denied by BOJ and Japanese govt for two decades. Although a natural disaster like this one is not totally comparable nor even wanted, the reality is that this destruction of infrastructure caused by the earthquake and resulting tsunami may result into a positive start for Japanese economy.

Before I talk more about Japanese economy and the impact of this destruction on it, let me talk about some historical events. There have been so many natural and man-made disasters in the last century but I pick only the biggest ones. Let us start with WWII, certainly not a natural disaster but a man made horror. The last secular bull market started with the WWII. Then, what happened after 9/11? We all know the US markets posted big gains after the unfortunate event of 9/11. Although this can not be an event that could be compared in magnitude with WWII, but once again it showed how destruction did not lead to sustained stock market downside, instead it was the turning point! Then, let us revisit the 2004 South Asian tsunami, what happened? Indian and other affected Asian markets rallied sooner and even economies of these countries grew. Also, the Mumbai terrorist attacks in Oct 2008 coincided with a bottom for Indian markets! There are many other examples but the question is what's the logic?

Its actually simple. When there is a crisis in a place, there is in fact an opportunity for growth! Yes, the destructed place has to be rebuilt and so there is a flow of money towards the opportunity. It happened during and after WWI, WWII, and it must happen now, in Japan. How long it should take? I think answer depends on the actual situation of nuclear reactors and the radiation threat. If that stabilizes, then we may see Japan regrowing sooner and faster.

The initial reaction of Indian markets on the Japanese earthquake news was positive. Most probably this happened as investors felt foreign money would now flee from Japan and enter India. I think this is myopic vision and I see the possibility of exactly opposite happening in coming days.

I feel really sorry for the people of Japan who were affected by this disaster, and I have the deepest sympathy for them but this is the reality. The destruction, although very upsetting for many Japanese, may actually bring forward a new age of growth and economic prosperity in Japan. Ironic, but that's how things are sometimes!

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