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Testing The Bullish Resolve………

Testing the bullish resolve………

EXECUTIVE SUMMARY

  • The week ended in a tentative fashion, leaving us with no specific information of the real intent of the market. On the one hand, as mentioned earlier, there is a willingness to bottom. But at the same time, there appears to be an unwillingness to move higher from good support clusters. This dilemma needs to be resolved soon.

  • The possibilities for what next to the downside are discussed in detail in this letter. The conditions for a continuation of the rally are a few and are also highlighted within.
  • Bank Nifty fared better in the last week but it needs to fire a lot more cylinders in the week ahead if it has to help the Nifty stage a move higher. IT and other sector indices are all neutral at the moment. So its left to the Banks to charge up the sentiment.

  • Sentiment is on a tenterhook. Watch whether bullish news during the week gets any bullish follow thru or it is bearish news that is dragging market down. This will give us a clue of the bias as we move further into the week.
  • Index affecting results due this week include Bajaj Auto, ITC, SBI and Coal India.

INDEX TRADE SUMMARY

  • We wait for some clear signal of trend (> 8330 or below 8190) as a signal to initiate trades in the Nifty.

STOCK TRADE SUMMARY

  • Views on several stocks provided for the week ahead.

 

INDEX REVIEW

Last week’s trade was a kind of neutral play as it appears on the charts. The weekly candle shows a small body affair, the second one in succession and coincidentally around the same price zone as the two doji type candles seen back during the decline in Dec ’14.  The two dojis ended the decline the last time- will they do so again this time? Everyone hopes so but right now, it appears that the market is caught between an intent to bottom (something that I wrote about a few issues ago) and an unwillingness to rise! That makes life difficult for us as analysts and traders, for we are unable to pitch our tent either with the bulls or the bears. The weekly chart shown here also has the Gann angles marked on it and we can see that the recent lows have all been made against support Gann angles coming from prior lows. The hesitation at the current levels is actually creating a small congestion zone.

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I had featured some similarities with the bottoming formation back in Aug 2013 as well and that one still persists. So the double doji on the weekly charts is the second repeat pattern that is forming. Reader Rakesh Shah from Mumbai has highlighted to me the rare but beautiful Mirror Image pattern of the Nifty in recent times and we can see how incredibly symmetrical the two sections on the chart are. His question was will the move earlier to the start of the pattern i.e. decline of December now repeat as a rapid rise from here? The answer to him is that I don’t know. Hardly much research is available about Mirror fold patterns and my experience is that they are difficult to spot in advance or forecast that they may happen. Also, the end of that pattern can be foreseen (in this case, the decline back to near 8000 levels) but there is little evidence of post pattern price behavior. I recall that only Michael Jenkins has done some work on this pattern and he has written about it in his books but few other authors have. We would all, I am sure, welcome another spirited rise in the market but it is difficult to forecast on the basis of this pattern.

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Another more predictable pattern however is the triangle that seems to have developed and this is more visible on the hourly chart . Ideally, triangles are continuation patterns and since this pattern has developed after a strong decline from the 9191 high, it has to be presumed that the possible breakout from this pattern could be downward. If that is so, then the target offered by the pattern suggests around 7850 levels. If one goes back to the weekly chart I have shown earlier in the letter, you will find that the next support Gann angle cruises around that level as of now. In the same chart, note the blue line angle that is coming off a more recent swing low is also rising up into the 7850 zone. So there are two Gann angle supports there. Adding more clusters to that zone is the next chart of Nifty futures daily with Gann angles added . Here I have drawn the angle for the downtrend (in orange) and we can see that the lower support angle will be hit somewhere in the region of 7850 or so if declines were to occur.  Not shown on the charts but using my Price cycle by degrees method of Gann, I also come up with 7862 being a 180 price relation with the tops.

 

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I am intrigued to find that most supports in this zone around 7850 are coming from Gann technics. Fibonacci levels (using combination of retracements, extensions and projections) are all pointing to 7750 or even lower. Most of the times, Fib and Gann levels would tend to cluster around similar levels – as they had done near the 8050 zone recently- but they are at variance ahead. The final chart on Nifty future for this week shows the next swing lows projected ahead and how they would probably meet up with the Median Line level of the pitchfork that is containing the moves currently. This also is seen around the 7850 levels.

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The long and short of this analysis is that if the market is to go up it had better do so immediately. I had titled the last letter as Make or Break time and the current week’s analysis just goes to prove that the title was quite apt and indeed, even more so for the week ahead! The index has so far made heavy weather of moving past the 8330-50 zone and we can see on the charts that there are two rather mean looking long body bearish candles with their tops around that level. It can be noted on the hourly chart shown earlier that the prices moving past 8335 would also succeed in moving up out of the triangle pattern. The same chart also shows the moving average bands that I track and this also would be crossed if 8335 is grabbed and held. Thus it is quite clear what the index needs to do for the coming week if it wants to sustain the rally attempt.

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So our trade for the week too is quite clear. We go long if there is a fresh move to the upside, showing strength. If it doesn’t, we stay idle. If prices start weakening and fall below 8200 or 8150 levels then we give up on the bullish expectations as the probabilities for a break of the last swing lows would increase. There is no doubt a chorus for supports around 8000 and even I have been part of that (based on evidence rather than just a ‘ feeling’) but looking at the current set up on the chart it seems to me that this consensus has not really resulted in a big buying wave. The bias for a rise is still there but unless we also see actual buying occur, the bias remains just a desire. Markets need actual buying to move higher. That is the only truth. Over the last several letters I have defined several factors that point to a halt in the decline and paying respect to those, the trend has indeed stopped for a while. But that is just part of the deal. The balance portion of the deal to come in with some buys. The market, at this juncture, I feel, needs a dose of some good news. Nothing much has been forthcoming unfortunately. The adventure spirit in traders has to be rekindled. While there is no doubt that the interest is still quite high in the small and mid cap space, those do not contribute to index moves and therefore the sentiments don’t get stoked. Petrol price hikes from rallying oil prices don’t help. The fact that 80% of people polled report that they are expecting a rate cut in the forthcoming Rbi meet in June first week do not help. The moves in bond yields locally and internationally do not help. The breakout upward in bullion prices do not help. (short term  analysis of UsdInr and Gold are added this week. See below).

 

Bank Nifty fared somewhat better owing to the fact that the Psu bank results were not as bad as anticipated. That is a double negative turning into a positive but this cannot carry the prices too far, as mostly, it produces short covering. Private sector bank stocks, that contribute most heavily to BNF moves, are still caught in some range play and until they start firing we are not going to see the BNF move up and support the price action in the Nifty. The way things are, we would need to see this happen for the Nifty also to surmount a challenge on the 8335 resistance zone. So the banks actually hold the key to upside moves in the week ahead, I would think! What about IT index? It is quite neutral at the moment and itself in need of some sustenance so we cannot really expect to help the Nifty make its upward action. We should keep a watch there but if it happens, fine, else we just let it be. Almost all the sector indices are neutral and trying to get back on their feet or into some consolidation. None of them appear to be in any position to power the index ahead.

Given this situation, the positive bias seems to be slipping and therefore we need to be on guard with regard to pending long positions. Also, investments into the market, though warranted from the longer term perspective, may need to be tempered and done in a phased manner, at least until technical evidence improves. Investors and funds need to be on their backfoot here while traders may need to be ready to switch their caps frequently from bulls to bears to back to bulls. Volatility is a feature right now in the market because of the high level of uncertainty that is prevalent. While there is little doubt about the longer term picture, it is an undeniable fact that we all have to experience the market from day to day or hour to hour or for active traders, from minute to minute. Unless we have set our minds up properly to read the data, it becomes difficult to deal with volatile situations when they occur.

COMMODITY UPDATE

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CURRENCY UPDATE

After several weeks of uncertain trading, as evidenced by small body weekly candles, the movement of the last week showed strong moves. This has occurred on higher than average volumes and the prices, have, in the process, moved past the confines of a declining resistance Gann angle line. The chart shown here is also annotated with Gann swings and it is noted that the current upward swing- which is in progress since the lows at 25500 back in Mar 15- have now moved past the first of the average swing lengths. This sets up the possibility that the prices can now go towards the next average swing length that the prices exhibit which is around 3200-3300 points. Such a swing length will give us a target around 28800. At this target zone prices will reach prior swing tops recorded in that area during the Feb’15 rally. The current move is well supported by momentum and long positions can be created at current levels and on intra week dips with a stop at 26500.

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The USDINR pair was on a good bull run since mid April and this had helped carry the prices from a low at 62.29 to a high at 64.55. This high was slightly above the previous upward swing that had occurred back in Dec 14 and hence a resistance point. The appearance of a strong bearish candle on May 13 halted the continuation of this bull run and set the stage for a reaction. This was duly confirmed on the following day when the pair showed another strong bearish candle. Over the last three trading sessions then prices have pullback to the 38% retracement level of the rise.

It is interesting to note that the drive to the top at 64.55 did not create any divergence pattern in the RSI indicator (see lower panel) and thus we have to conclude that the current pullback is only a reaction within an overall uptrend. The currency pair is therefore expected to continue with the trend once this reaction is complete and hence further weakness is visible for the INR in the weeks ahead. The current reaction may continue towards the 62.50 zones but we don’t see the pair falling beyond that in the near future. Looking at the pattern it also appears possible that we may spend time churning between the 62.60-63.95 zones for a while.For the current expiry, it may be worthwhile to look for some short strangle strategy of the 62.50-64.00 range. Alternately, one may wait for the reaction to reach the support and seek to buy there for a rally back to 63.95 levels.

STOCKS

In the last week I had featured a Table containing stocks in differing trends. Checking up on that table I find that 59 stocks from the futures list continue to be in the Bearish list.   In the bullish list are 22 stocks and the new entrants into this list last week were Jubilant Foods, Union Bank and Apollo Tyre. No stock moved out of the list.  There are currently 28 stocks in the Turning Bullish list. Joining this list during the week were Ambuja Cem, Andhra Bnk, Axis Bank, Bob, BOI, Bata, Dr Reddy, Hdfc, IOB, IRB, LIC and TechM. It can be seen that several bank stocks have moved into this list.  In the ranging list are 35 stocks.  Some stocks moved out of Turn bullish into Ranging list. These continue to be bullish only that the trend aspect has not yet taken hold there. This table helps in the following way. If across the week we see stocks moving from Ranging into Bullish list then the market is taking a turn for the better. Alternately, if the stocks from Bullish list drop into Ranging )or worse, into bearish) then the market is turning weak. A third way to look at changing trends is when the number of stocks in Turning bullish increases.
During the last week, I reckon that stocks exited from the Bearish list and moved to other groups. So to that extent, the situation in the stock futures area is turning slightly better. But the reasonably large number (35) in the Ranging list coupled with the 28 from Turning bull suggests that a good chunk of the market (63) is still either tentative or bearish (59). This does not make for a situation to become aggressive in the stock futures area. One should therefore be a bit circumspect about the approach in stock futures trading.

Adani Ent from the bullish list has shown a nice top close. Continuation above 730 this week would trigger fresh buys in this counter.
Bajaj Auto continues the good work that we had spotted in earlier letter. 2200 levels is 38% retracement. Results are due on Thursday so watch price action during that period. Outlook continues to be positive. If results are good then stock will get a big boost.
Eicher Motor is in the bullish list but has moved into a perfect 1.618 extension target zone at the end of the week. If long take some profits. Avoid fresh longs until a pullback occurs.
HDIL came out with pretty bad numbers and stock has been punished. 103 is an important inflexion point and if that is lost, stock may slip into a lower bracket in trend ratings and hence this can be one of the candidates to look for shorts in case weakness exhibits.
Idea has dropped into a nice 61.8% retracement support and the Rsi too has dipped down into the 40 zones. Pitchfork support is also available nearby. If sector is in demand or market is better then can look for longs in this name.
Jub Food has been a sharp mover last week and prices have hit 1.618 projection levels. But momentum is high on the advance and pitchfork indicates possible more room. Intra week dips to 1660-1700 can be looked upon as buying opportunities. If market is strong then stock can be bought on new highs as well with a tighter stop.
RCom managed to stave off the bearish pressure in the last week. But it needs to work up some more upside momentum to get back to trended times. If long continue to hold with last week low as stop.
UPL charged higher and continues to appear the best bet for longs at current levels as well as on dips.

 

 

 

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