A couple of weeks ago, there were some ‘worries’ about how Indian stock market is likely to perform in the near future. Reasons cited were:
- US Sub-prime mortgage crisis may have ‘continued to effect’ Indian stock markets;
- The appreciating Japanese Yen may have made the hedge funds to offload their holdings in emerging markets;
- Possible political uncertainty may ‘worry’ the markets.
In the last week’s review, we had indicated that the indices appeared to have bottomed out. We gave 3 reasons to believe so.
- Solid buying support came in after every fall
- A bullish ‘harami’ candlestick pattern in weekly chart with medium reliability
- Decreasing price and open interest in August contracts of Nifty futures
Those who were skeptical about Technical Analysis may have found out what exactly was reality.
Indeed, the indices DID bottom out. This week, the Nifty gained 273.85 points or 6.54% on a weekly close basis. In the last one year, it gained 5% or more only once during the week ended March 23, 2007. This week’s gain is only 7th such occasion in the last 3 years. That way, this week has been quite a remarkable turnaround in Indian stock markets.
The following table summarizes the daily gains of Nifty during the week.
| Date | Points Gained | % Gain |
| 27-Aug-07 | 112.45 | 2.68 |
| 28-Aug-07 | 18.10 | 0.42 |
| 29-Aug-07 | 38.60 | 0.89 |
| 30-Aug-07 | 53.00 | 1.22 |
| 31-Aug-07 | 51.70 | 1.17 |
It can be seen that Nifty didn’t lose a single point throughout this week.
Let’s now discuss the daily chart of Nifty.
The index has completed one full Elliott wave cycle as can be seen from the above chart. Waves 1 – 5 and a – c are already over. To begin a fresh cycle, the index needs to make a higher high and a higher low.
In the chart shown below, Fibonacci retracements are displayed. Nifty has successfully closed above 4401 i.e. 61.8% retracement which is the technical recovery target.
On August 27, a “Three outside up” pattern was formed in the daily chart of Nifty. Though the shadows of red candle were not engulfed by the shadows of the green candle, it is still a pattern with a lesser reliability. The green candle on Monday had a partial upward gap and this confirmed the engulfing pattern formation.
In the weekly chart, a bullish “Three inside up” pattern has been formed as shown below.
The bullish pattern in weekly chart confirms the reversal. But in monthly chart, a bearish “Harami” pattern has been formed. Watch the long lower shadow. This is an indication of the lower side volatility. Previously, a bearish “Engulfing” pattern was formed as shown. But these two candlestick patterns need confirmation on the third period (day, week or month). Without confirmation, the patterns are insignificant.
Forecast for the next week:
Now that we have confirmation of reversal in short and medium term charts, we need to look for the formation of first wave in daily chart i.e. a higher high and a higher low. The index is likely to face resistance at 4530 and ideally, a close above 4530 will complete the formation of first wave.
Even if that does not happen, 38.2% and 61.8% retracement levels should hold. Considering a low of 4002 and a high of 4471 these levels work out to 4293 and 4183 respectively. So, if a correction in the index starts straightaway next week (since the index gained for six consecutive days in a row) these are the two levels to watch out for. A reversal should occur after any of these retracements are breached.
We still remain positive on Indian stock market. Any decline in the index next week will only be an opportunity to enter the Nifty futures.
Futures & Options Market:
It can be seen that the price and open interest are increasing for the September contracts for Nifty futures. This again, is a bullish sign, meaning more buyers enter the market as price increases.
IPO Update:
The India Street analyzed Puravankara Projects Limited IPO. Its issue price was Rs.400. It got listed on August 30. It opened with a negative premium of Rs.90 at Rs.310 and closed at Rs.362.30. However, today it gained slightly to close at Rs.377.05.
For the top 10 gainers and losers in the overall market for this month please read my earlier article, “India’s hottest stocks for August 2007”.
The top 5 gainers and losers for the month among index stocks are given below.
| Scrip | % Gain | Scrip | % Loss |
| SAIL | 12.01 | CIPLA | 12.75 |
| BHEL | 9.29 | VSNL | 12.01 |
| TATASTEEL | 5.10 | HINDPETRO | 8.79 |
| RPL | 3.63 | GAIL | 8.38 |
| RELIANCE | 3.56 | TCS | 7.95 |
The India Street analyzed BHEL in “Stock of the week: Bharat Heavy Electricals Limited” and VSNL in “Stock of the week: Videsh Sanchar Nigam Limited VSNL”. We discussed about CIPLA in my previous article, “5 More Stocks to Avoid in the Short Term”.
Our long term pick Nagarjuna Fertilizers Limited gained 72.49% this month. Our short term pick Tata Sponge Iron Limited gained 20.84% this month.