Jan 2008 Top Not Breached - AP

Despite all the visible strength and the fact that BTST traders were not allowed to sell the stocks purchased the previous day, the intermediate top of 5545, which was reached in January 2008, was not crossed.

Tata Steel Foretells a Bearish Future

Around June 11, 2010, it was noticed that Tata Steel was indicating that the future for metals was going to be very weak. A head and shoulders pattern on a descending neckline provided all the clues that something negative was in place for iron ore companies. At the time, it was the 40 percent mining tax that Australia slapped on mining companies owning mines in Australia, a move that was softened later by the new Australian Prime Minister.

Today when we see Tata Steel, it is clear that the right shoulder has been formed, unless the high around 550 is taken out again. Yet nothing is safe for Tata Steel unless 675 is knocked out which would make the right shoulder higher than the left and thus negate the H&S pattern.

And Why the Nifty May Not Correct - GV

In my earlier post [Nifty Looks to Undergo Correction], I cited host of issues why the Nifty is looking weak - from conventional technical pointers - while I suggested a possible medium-term bearishness of sharp and sustained nature. Now I am presenting an effort to consider whether the turnaround is anywhere in sight.

In May, FIIs sold a cool Rs 12000 crore while DIIs bought a net Rs 6400 crore. Since then FIIs have been buying Rs 7700+, Rs 8300+ and in August Rs 4000 crore [on date of writing] against DII selling of Rs 4600+, Rs 6300+ and Rs 2300+ crore in August [on date of writing]. Obviously it is the FIIs who have been holding the index or certain segments of the market, or even certain stocks to their liking. This in spite of a 'possible distribution' by the Fourth Quater, as explained in earlier post.

All the reasons given in the earlier post - rising channel, index near the upper band, negative divergences in important oscillators cannot be facts that are tracked only by individual traders, but also by the FIIs.

But then simple common sense would demand that the FIIs should have been looking to hedge their positions in futures if they are getting to dig in to the last nickels from their bags of money. This in turn would make them want to hedge their positions - especially considering that one quarter of the market - the DIIs - have consistantly been selling which is a known factor to everybody.

So, do we see any sizeable hedging in futures? Actually we haven't seen any at all - both in index futures and stock futures unless they have done this in options.

In the index futures FIIs have net sold very nominal Rs 469 crore and in stock futures they have net sold another smallish Rs 432 crore in this contract month to date. Though in the previous contract month they had net sold Rs 2700+ crore and Rs 1000+ crore, while they had net bought an equivalent value in the June contract month - does not say much.

While their hedging in futures is rather thin, in recent days since 9th of this month, the OI in certain strikes - like from 5300 to 5500 - has gone up by about 44 lakh points in index puts, while it has gone up by only 10lakh points in index calls of strikes from 5400 to 5700. In these days of pessimism, I cannot think of retail investors writing put options and if the FIIs have a clear gameplan then they can very well do the writing - neither margin nor uncertainity would be a problem nor fear psychosis.

Secondly, the maximum pain theory workings reveal that the outflow for the writers shoots up sharply when the index goes below 5400 and not so much when it raises above 5500. Roughly said, a study of option trades suggests the Nifty is quite possibly biased on the longs.

To illustrate, as on closing of 13th the outflows to writers for current OI, if nifty were to close at various strikes would be as below:

5100 - 838
5200 - 506
5300 - 264
5400 - 154
5500 - 191
5600 - 354
5700 - 611

The lowest at 5400 is a misleading thing as it has remained so since beginning of the contract. It is possibly so that quite probably while somebody is buying calls, they themselves could be writing the puts, or vice versa, provided they are market trend deciders.

Because of this inference, coupled with the fact that I do not see much of futures selling by the FIIs, I am inclined to believe that Nifty could test the upper band of the rising channel and possibly break above it. If it so materialises then the bear trap and short covering can take it longer and farther in to the near term. We might even see a blow-off rally kind of move.

Distribution is best done in euphoria and accumulation is best done chaos.

The FII fund flow chart - black line for their derivative trades and white for their equity:

The indicators in the middle and bottom inner windows are results of my efforts to convert trades as indicators to issue buy and sell signals. A cursory look would reveal that the indicators have been quite decent even in these days of a rangebound trading. And notably there is no sell signal currently.

For a long time, I could not satisfy EW Neowave rules that I know of with my earlier counts. Recently I changed the count with [II] ending at last May's highs and [iv] as a Double combination ending at 4786 on May 25, with the 5th and final impulse of the larger 'A' in progress and many of my earlier problems seem to have been solved.

If we are in an impulse move from 4786 and it does so look then we could be in the (iv) sub-wave with (iii) only slightly larger than (i) and we might have ended a double combination at 5372 on 12th. If all of this is correct then 5625 and 5780 look quite in the realm of possibility in the near term.

Of course now the usual rider: In the days of mind boggling volumes in Nifty options and futures it may not be an issue for the funds to sharply increase their hedging levels in a very short time.

Nifty Looks to Undergo a Correction - GV

To many, the Nifty looks poised to correct. The hourly charts shows:

• A rising channel, which indicates a breakout to the downside.
• Bearish divergencies on RSI & MACD.

On the economic front, we see a falling IIP and steady inflation and RBI trying to drain out cash and possibly a rise in the cost of funds.

The daily chart too shows:
• A rising channel.
• The index painfully close to the upper band.
• Negative divergences in both RSI and MACD.

From a near term perspective these are not very worrisome. Technical analysis (TA) always gives two 'effects' to a single 'cause' - surely one of them is bound to materialise. If negative divergences suggest weakening of trend, there is another school of thought that says “in to a strong trend, negative divergences could be suggesting continuation of the trend”. Even in this case, the trend has been continuing for a while now despite so-called bearish divergences, sky rocketing inflation, anticipated RBI moves, etc.

The Indian stock markets have four quarters at play: retail, FIIs, DIIs, and the fourth unseen quarter – a much maligned group responsible for all our ills; a group never seen but only talked about but which is strong enough to do something unlikely on a given day. What worries me about the medium term health of the market is the signs I get from deep within the markets, which point to the activities of this fourth quarter.

If the Nifty could rally intraday on the back of a sharp fall in US (thus, poor sentiments) on the 12th, then there must be the fourth quarter playing; especially since on the day, FIIs net-bought a mere Rs 218 crore while DIIs net-sold a huge Rs 656 crore.

I have a market breadth study that reads as below:

Market Breadth as a rule slopes down. For example, my 'proprietory' adjusted breadth gave a reading of +0.37 on December 13, 2001 when the index was in 1100's, and now reads a minus 67 - yes, minus 67.3551 - with the index in 5400’s.

When the Nifty was in the trending phases the indicator gave very early and clear signals and most of the time it hit the bull's eye. But in consolidation phases, it does not say much except showing a slow - a painfully slow - message of accumulation or distribution.

However, reading this can be very tricky, made so by the natural downward bias of the indicator. Essentially one had to go by the slope of the indicator over a reasonably long period. So I created a histogram for easy reading of divergences.

From Nov-09 - Mar-10 there was a positive divergence suggesting accumulation. From Jan-10 to 'now' there is a negative divergence.

The above chart tells me that the larger market has been "undergoing shifting of stocks" that rallied during this period, which is nothing new. Except in a foolishly bullish market not all sectors rally - they only take turns; however, the number of such 'rallying-phase stocks' have been dwindling. Compare this with the period from Jun-July last year to Jan 2010. The indicator stayed sort of horizontal. The histogram / indicator for the period till June-July 2009 to be ignored as that was the last phase of the secular rally. Now we are considering a phase that has been mildly rallying or sort of consolidating. In this phase, the breadth has been increasingly weakening suggesting "possible distribution" sectorwise.

The depths of ocean a depths of the markets are only for the cunning and the gullible - the balance 2 quarters of the circle leaving the FIIs - the D&F variety. Thus, the Nifty has to fall some time - after all the price travels only in waves. And it has fallen before also and so it will in future as well. What is worrying this time around is that if the 4th quarter had been distributing then the fall could be more pronounced and the recovery may not be swift as before - 'V' shaped things may not happen - after all the 4th quarter would require some time to take position again. In other words, the fall not only could be deeper but recovery could also be slow after the inevitable volatile periods.

To be exact, my worry is not that it might correct or the timing of it but as and when it does, it could be a deep one and recovery could be slow.

Caveat: Prior to hitting 6000+, in mid 2007 onwards, my MB indicator was sharply sloping downwards - possibly caused more by heavy tranches of selling rather than gradual and consistant weakening of breadth (as could be the case now) because there was no negative divergence in the histogram then. In other words the indicator gave one wrong sell signal while the Nifty was still climbing and continued to do so but never showed any negative (wrong) divergence. The indicator did catch up with the index but that was a clear 700 points later. If I remember correctly, the DIIs were selling prior to May 2007 as the FIIs were getting deeper into their frenzied buying while commencing that rise of 5000 to 6000 on the index. And later on, the DIIs simply could not take the heat of 'not being in the party' and joined late and were to regret it deeply in early 2008. For all I know, something like that can always happen.