Nifty faces strong resistance for medium term

It has been well established by Ralph N. Elliott in his Elliott Wave Theory that price movements of a security can be predicted by observing and identifying a repetitive pattern of waves. The price movement consists of 5 waves in the direction of the main trend followed by 3 waves in the corrective trend. The duration of these waves can last for centuries (Grand Supercycle), decades (Supercycle), years (Cycle), months (Primary), weeks (Intermediate / Minor), days (Minute), hours (Minuette) and minutes (Sub-Minuette). The 5-3 pattern remains constant although the time span of each may vary.

Technical traders use this theory to identify breakouts for profitable investment opportunities. There are several web sites and books related to this theory; Wikipedia describes the principles in detail. Cyclpro has an exhaustive list of rules and guidelines which need to be observed during the Elliott Wave Analysis.

However, for those with limited resources of time and energy, there are few basic rules that need attention.

1. Wave 2 cannot retrace beyond low of Wave 1; i.e. not more than 100%
2. Wave 3 is never the shortest among impulse waves 1, 3 and 5. This means either Wave 1 could be the shortest or Wave 5 could be the shortest.
3. Wave 4 cannot fall below high of Wave 1.

Using Fibonacci retracements of 38.2% and 61.8%, following relationships between waves can be identified.

Wave 2 = 61.8% of Wave 1

Wave 3 = 161.8% of Wave 1

Wave 4 = 38.2% of Wave 3

Wave 5 = 100% of Wave 1

The above values are approximate and have been found to occur frequently in well trending markets. It is not uncommon for Wave 2 to fall below 61.8%, there are cases in which Wave 2 has retraced only 38.2% of Wave 1. Similarly, Wave 3 has sometimes retraced even 261.8%.

So, what may happen in case these guidelines are violated?

The answer is simple. The move becomes “suspicious.” This is usually considered as a warning sign; a trend reversal may follow soon.

Let us now discuss the long term chart of Nifty.

In the above chart, it can be seen that:

1. The long term bull market started in April 2003 when Nifty had a low of 920
2. Wave 1 ended at 2015 during January 2004
3. Wave 2 retraced 66% and ended during May 2004.
4. Wave 3 retraced 227% of Wave 1 and ended during May 2006.
5. Wave 4 retraced 47.4% of Wave 3 and ended during June 2006.
6. Wave 5 retraced 343% of Wave 1 and ended during January 2008.
7. Wave a retraced 75.5% of the entire movement from low of Wave 1 (920) to high of Wave 5 (6357) and ended during October 2008 with a low of 2253.
8. Wave b has retraced 60.7% of Wave a when it touched 4744 in August 2009.

Cyclepro guidelines suggest that Wave b is likely to retrace 38.2%; the next most likely retracements are 50% and 61.8%. It also says that the time taken by Wave b is usually between 61.8% and 161.8% of the time taken by Wave a. Wave a lasted for 9 months; wave b is currently in its 11 th month.

Taking all these facts into account, we may come to the conclusion that Wave b may end anytime and Wave c is likely to start afterwards.

Nifty has not shown any kind of reversal signs so far in daily charts. The support trendline remains unpenetrated yet. We may see some more sideways movement in the near future. Nifty will face strong resistance around 4797.

Bullish stocks for short term:

CMP = Current Market Price BB = Bullish Breakout TT = Technical Target

1. Binani Cement: CMP 63.55 BB on August 28 TT 83.85
2. Gitanjali Gems: CMP 117.65 BB on August 25 TT 162.30
3. ISMT Limited: CMP 37.55 BB on August 27 TT 56.40
4. Omaxe: CMP 116.45 BB on August 28 TT 170
5. Tata Sponge: CMP 222.40 BB on September 4 TT 265.80

Buy These 5 Stocks and Forget about them

In my earlier article, “Psychology of investing and trading” we discussed about long term investing. The long term investors have a distinct advantage over others in the sense they need not follow the market every day or week. People with busy schedules, NRI’s, etc. can be long term investors. As the name implies, one has to hold the stock for a year or more, depending on his risk profile and profit margin.

Let us now analyze the following stocks from a long term perspective.

Note: I received a few queries about using technical indicators on charts. The indicators (leading as well as lagging) can be useful in confirming a particular pattern. The primary focus is on price action, chart patterns, candlestick patterns, supports, resistances etc. Indicators alone cannot be used for investing or trading since these are derived using various formulae from open, high, low, close and volume.

Chambal Fertilizers and Chemicals Limited:

This company is a part of K.K. Birla group and was promoted in 1985 by Zuari Industries Limited. Chambal operates two nitrogenous fertilizer plants and has the largest private sector fertilizer complex in India. The combined capacity of the two plants is around 1.73 million tonnes of urea per year. It caters to the northern and western regions of India and supplies urea to nine states. The company has also entered into food processing, textiles and software. Its main product urea is marked under the brand name “Uttam Veer”.

The company’s net profit for the financial year 2006 – 07 was Rs.151 crores while for the previous year it was Rs.203 crores.

In the monthly chart shown above, it can be seen that the stock took nearly 11 years to break its previous high at 39.50. But the breakout was not accompanied with good volumes. The stock had declined since February 2006 and did not break its support trendline. This month it has closed above its short term resistance at 46.80 with record volumes. The stock has already retraced from a low of 27 in July 2006 to a high of 54 this month. The long term target for the stock will be 71 and 91.

Gitanjali Gems Limited:

Gitanjali Gems Limited is an integrated diamond and jewellery manufacturing company. Its products are marketed under the brand names ‘Asmi’ and ‘Gili’. The product list includes rings, pendants, ear rings, two stones, colour stones etc. Computer aided design and manufacturing are used in the production of jewellery. Its manufacturing facility is located at Andheri, Mumbai.

The company became public last year when it came out with an IPO at a price of Rs.195.

The company declared a net profit of Rs.82 crores for the financial year 2006 – 07.

The response to the IPO in the secondary market was not an overwhelming one, as it lost about Rs.24 during March 2006. It did however manage to touch a high of 267 in May. During the heavy fall in the index between May and June last year, this stock too was not spared – it fell to a low of 108.20. On the above chart, watch the waves marked 1, 2 and 3. Apparently wave 3 is in progress. During the corrective wave 2 it never really closed below 50% retracement at 186.15, which is a sign of healthy bull market. This month it has broken its resistance at 267 and closed above it. The longer term target for the stock, when calculated from a low of 177.10 works out to 464.

Honda Siel Power Products Limited:

Honda Siel Power Products Limited (formerly Shriram Honda Power Equipment Limited) specializes in manufacture of 4 stroke portable generators, water pumps, engines & lawnmowers. It is a joint venture between Honda Motor Co. Japan and Siel Ltd., with 67% equity stake of Honda Motor Co. Japan.

The company declared a net profit of Rs.17.38 crores for the financial year 2006 – 07.

In the monthly chart shown above, the stock had a “Triangle breakout” last month with huge volumes. The triangle height works out to 108.90. This when added to the triangle top of 210.95 gives a target of 319.85. Minor resistance at 249.40 has been broken but the stock has not closed above it. The next resistance for the stock will be its previous high of 348 made during September 1997 (Readers might now realize how much time it may take for a stock to come back to a particular level). Once 348 is breached, the stock may touch 408.

Malu Paper Mills Limited:

Malu Paper Mills Limited is promoted by the “The Malu Family” and all its directors are from the family; They are first generation entrepreneurs. This group has business interests in coal and lignite trading , manufacturing and trading of MS electrodes, manganese processing and exports, MS Ingots and castings.

The group has set up two paper manufacturing units at Nagpur. The units have a capacity of 8,250 tonnes per year of kraft paper and 19,800 tonnes per year of newsprint. The company declared a net profit of Rs.3.56 crores for the financial year 2006 – 07.

The stock, with an IPO price of 30, was not initially well received in the secondary market. But it still managed to reach a high of 44.15 during December 2006. In the above chart, watch the price and volume decline simultaneously. This is an indication of bullishness. Currently wave 3 is in progress. Last month the stock had broken its resistance at 44.15 and closed above it. A bullish “Three outside up” candlestick pattern can be seen in the chart. It is particularly significant in medium and long term charts. The stock can be expected to reach a target of 75 in the long term.

MSP Steel and Power Limited:

The company manufactures sponge iron (200,000 MT/year), mild steel billets/ingots (100,000 MT/year), TMT bars (90,000 MT/year,thermomechanically treated), ferro alloy products, industrial and medical oxygen. A power plant of 24 MW capacity is located at Raigarh. The group has manufacturing facilities in the states of West Bengal, Orissa, Jharkhand, Andhra Pradesh, Chhattisgarh and Maharashtra. The company declared a net profit of Rs.7.1 crores for the quarter ended June 2007.

The stock was issued at an price of Rs.10 during July 2005. It touched a low of 8 during June 2006. Between May and June 2006 when many stocks lost more than 30% to 40% this stock lost ony 12%. Last month, it broke its resistance at 21.10 and closed above it. The longer term target for the stock is Rs.40. It is to be noted that correction, if any, in the stock should be used only as opportunity to enter long positions. Support exists at 21.10 which is its previous high as well as 38.2% retracement level.