Trading Notes MAY 05 2008
A rising tide lifts all boats, even the leakiest ones
Catch-up Game or Real Strength
As a Technical Analyst and a trader, I am trained to believe what I see on the screen. I have no business to ask - "Why prices have moved up?". I have to just accept the fact that prices have moved up and trade accordingly. There is no doubt that market is showing more strength than weakness and more and more sectors are now participating in the upmove. On Friday, even Autos joined the upmove bandwagon.
But is this a good news or bad news? The way different sectors are participating in the rally or falling off (like FMCG, Oil and Gas, Health Care) - it appears that the current upmove in Nifty is more of a catch-up game with Global markets, than real rally because of local factors. There is no clear leadership in the market except Technology sector. One week a particular sector looks good, and the very next week - it goes out of favour. It is this aspect of rally which a trader should be little careful about.
This can be shocking news that India from being one of the most sought after market last year has become a market which is just doing catch-up game with strong up moves in global markets. One of the reasons why this has happened - Once a technical momentum gets broken in a market, it is very difficult to build it again. And generally to rebuild momentum - you need a strong fundamental reason which market has failed to get so far. On top of that, worsening inflation situation coupled with confused policy making has made matters worse.
I am not trying to find a fault with current rally. There is a saying - the most bullish thing a market can do is to go up. But as a market observer, I thought it's important to get your attention to this fact - the market needs sustainable legs to rally and that's what is missing right now. The market desperately needs clear leadership - a leadership which is backed by both fundamental and technical reasons
Global markets - Strength continues
Global markets negotiated resistance levels very well last week, and closed comfortably above them on weekly basis. The data points have also been supportive be it economic data or be it Corporate results. Friday was no different. According to Labor Department, US economy lost just 20 000 jobs in April much lower than estimates. The figures reduced the fear about the health of US economy. The market rallied on the news but enthusiasm faded away on news of S&P ratings downgrade of Countrywide Financials debt to junk. The downgrade clearly came as a jolt to the "worst is over" belief. Technology stocks also lost little bit of momentum because of lower than expected results from Sun Microsystems.
More market analysts are now embracing the fact that Global markets may show more strength than weakness in coming days. This is what Colin Twigg said in his market analysis - "The Dow Industrial Average reversal to a primary up-trend has now been confirmed by the S&P 500. Expect a test of the 2007 highs at 14000. While the market is recovering, this is more a function of cheap money than a booming economy the old maxim still applies: Don't fight the Fed. Milder than expected employment losses may hint at a soft landing, but the housing market collapse and resultant credit squeeze are likely to plague the economy for some time. Banking, housing and other cyclical sectors should be treated with caution"
Today most of the Asian markets are up strongly on strength in commodities. A measure of six metals traded on the London Metal Exchange, including copper and nickel, gained 2 percent, with copper jumping 2.3 percent. Markets in Japan, South Korea and Thailand are closed for holidays
Technical Factors - Nifty - Next Target is 5368
Nifty is slowly and steadily inching up, though it lacks momentum. Friday's action cannot be called very bullish considering market closed below its opening price. On a closing basis, the Nifty moved up 62.3 points or 1.21% to close at 5 228.20. But Nifty closed 36.8 points down as compared to the opening quote for the day.
Nifty May 2008 futures closed at 5253, at a premium of 24.80 points as compared to spot closing of 5228.2.
Though on weekly basis, Nifty did very well. It closed above key moving averages. The probability now points to more strength than weakness in coming days and weeks. Technically, the next probable target is 5368. This is the same level at which Nifty formed double top last time. The level of 5368-5400 is also 50% retracement of the complete fall from Jan 09 highs to March 18 lows.
The likely trading band in near term is 4950 and 5370.
Levels to watch out are -
Resistance 2 : 5368
Resistance 1 : 5300
Support 1 : 5150-5160
Support 2 : 5080
FIIs net bought stocks of worth Rs. 658 crores on Friday whereas DIIs net sold stocks of worth Rs. 18 crores, as per provisional figures. (Cash market figure)
The Futures & options (F&O) turnover on NSE was 36 304 crores - up 6% over previous day trading volume.
"Sell in May and Go Away" - Will this phrase be applicable this year? The strength in Global markets suggests otherwise.
The most important information available in a market is how it's acting right here, right now. A lot can happen in 12 months, so rather than make predictions about long term, it's best to take each day as it comes.
On a weekly basis, Nifty was up 2.27% last week.
The Sensex broke out of its trend channel, indicating the down-trend has weakened. Expect a short retracement to confirm the new support level at 16500, followed by a test of primary resistance at 19000...Colin Twiggs
The biggest problem in charting is wishful thinking. Traders often convince themselves that a pattern is bullish or bearish depending on whether they want to buy or to sell
Inflation is showing no signs of cooling off. On Friday, Government reported 7.57% WPI based inflation for week ended April 19 2008.
Market reaction can be sometimes very puzzling. On Friday, Government reported highest inflation reading since Nov 2004; and yet the best three performing sectors of the day were all rate sensitive - Banks, Autos and Real Estate.
The sell off in Metals applied brakes to the index. Sterlite Industries and Hindalco saw a sharp sell off on Friday on above average volumes.
Indian Market View - Sideways to Up
My Portfolio - ITC; and UTV Software.
Sectoral Chart clearly tells us that money is no more chasing defensive themes like FMCG and Healthcare which was the case a month back.
One sector where fundamentals and technicals both look great = Technology and especially mid-cap names.
Most of the auto stocks be it Maruti, M&M or Ashok Leyland - made good moves on Friday.
Mahindra and Mahindra faces strong resistance at 200 day moving average of 720. It needs to be seen whether stock clears this level this week or not. There are reports that company will sell a 3.68 per cent stake to a unit of the Goldman Sachs Group to expand its automobile and tractor business. It would be interesting to see market reaction.
Trading mantra - Patience is the key skill when it comes to trading.
Arvind Mills - Technically, Arvind Mills has gained lot of strength in last one month. It seems stock is consolidating sideways before next move. The stock presents great opportunity to accumulate with 70 as a medium term target.
One stock that has not participated in the last one month rally - Balaji Telefilms. There has been no recovery in Balaji Telefilms since April 01. The stock has delivered negative returns of 7%. Is IPL the reason?
Jai Corp - the stock made a strong upmove on Friday on trading volumes = 3.3x of 10 day moving average volume. It is a stock on which momentum crowd should keep an eye on.
Instead of watching TV to shape your trading decisions, use the price. Price is the purest form of information that the markets give..Michael W Covel
Despite commodity sell off, Brazil did well last week. The reason - Brazil was raised to investment grade by Standard & Poor's. There is no doubt that Brazil has taken leadership status as far as emerging markets are concerned.
As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks -- or, simply buy the entire market in the form of an index fundWarren Buffet
Longer-term trends still appear Bearish for the dollar and Bullish for commodities.Robert Colby
Trading is a fuzzy process and I mean fuzzy in the best sense of the word. That is, as in fuzzy logic, as in the willingness to accept the idea that things aren't exactly quantifiable and to forge ahead anyway....
(creator of the Bollinger bands)