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

India F & O Market Weekly Review

In my previous post we discussed about the possibility of a rally in the Nifty and its likely upside target of 3435. I had also mentioned that a confirmation is necessary in the daily/weekly charts for bullish reversal.

Nifty made a high of 3241 on November 5 but a bearish "three outside down" candlestick pattern (bearish engulfing pattern followed by a redcandle and lower close) was also formed. This indicated a bearish reversal in daily chart. Nifty closed higher for the next two days but for the last 3 sessions it has closed negative. MACD and Wilder's DMI both favour bearishness on weekly chart.

External factors like falling crude prices (from $147 per barrel to $57 per barrel) have not made any impact on Nifty. Readers may be aware that while Nifty went up from 1000 in 2003 to 6300 in January 2008, crude prices were also going up, from approximately $30 per barrel to $100 per barrel. So it is only the demand/supply forces determine the Nifty and its trend.

Let us now discuss the futures contracts of Nifty, Bank Nifty, Bharti Airtel, Infosys and Reliance. It is to be noted here that the charts are based on data for November contracts. The Open Interest is shown as green line.

Nifty:

The October 2008 contracts for Nifty expired on 29/10/2008. Few days prior to this, selling was witnessed in the November contracts as prices declined. This indicates a sell off. On 28th October Muhurat trading was conducted and hence the volume was low. We can see a healthy uptrend in futures since rising prices were accompanied by rising volumes. However, similar to Nifty (Spot), a three outside down candlestick pattern was formed, confirming the bearish reversal. When prices rose afterwards, volumes declined; this was followed by falling prices and rising volumes. After the 'healthy' uptrend, volumes should have ideally fallen when prices fell. This would have meant bullishness. Now that the volumes are rising with falling prices, we may conclude that the Nifty future is likely to test its lower support of 2207.

Bank Nifty:

We can observe a similar pattern in Bank Nifty too. However, no candlestick formation could be observed at the top of the uptrend.

Bharti Airtel:

Two huge "falling windows" or "downward gaps" were observed prior to the uptrend. In this case too, a bearish three outside down candlestick pattern was formed with a downward gap on the third day and increased volume. There is some sell off occurring over the last few trading sessions.

Infosys:

The most recent high of 1414 remains a strong resistance. The contract is now moving on a sideways pattern. The volumes are also inconsistent. This means that the market is currently undecided over the direction. Interesting to note that the sideways movement started on October 10, well before the expiry of Nifty October contracts.

Reliance:

The "falling window" formed on October 16 is acting as a strong resistance for the stock futures. Similar to Bharti Airtel, a three outside down pattern with a downward gap on the third day was formed. Rising volumes and falling prices over the last 3 sessions indicate sell off.

Conclusion:

Current technical scenario suggests that Nifty's bearish trend is likely to continue for the medium term.

Weekly Review of India stock market – February 2, 2008

On January 30, 2008 the US Federal Reserve cut the interest rates by 0.5%. This followed the 0.75% interest rate cut on January 22.

It is usually believed that the Fed rates have ‘positive effects’ on financial markets. Despite the 1.25% drop in interest rates in eight days, the Indian stock markets were not ‘cheering’ up!

Forget the news, remember the chart!!

Just to prove this point, take the case of Wire and Wireless India Limited. It has been making consistent losses since its listing. From 139.75 it fell to 30.30 in about 9 months between January/October 2007. But it bounced back strongly to hit 107.40 by December 2007. Why would the crowd be interested in buying the shares of a loss making company?

WWIL was included in Futures & Options segment effective November 30, 2007. Was this news a real positive? It can be seen that the stock ran up expecting one.

Coming back to the Nifty analysis for this week, the daily chart suggests that the index has not broken the 61.8% retracement line considering a high of 6357 and low of 4449 though it managed to gain 179.80 points (3.50%) on Friday. Wave ‘c’ is in progress. Note that wave ‘b’ has retraced 50% of the fall.

The Nifty is likely to get corrected some more. As mentioned during the previous review, 4449 is the last support. Let’s wait for a reversal sign to confirm that wave ‘c’ has ended. The lower side volatility during the last couple of weeks is very high. This can be seen from the long lower shadows. There seems to be some ‘bottom fishing’ but generally it has to be ascertained from trendlines and candlestick patterns whether the market has bottomed out. One positive factor is that this week’s trading range has completely fallen within last week’s range (also called inside day pattern). Once this is formed, a possibility of a breakout on either side could be anticipated. One can expect the upper side since the trendline has not been broken yet on the weekly chart.

On the long term charts, still there is no sign of a reversal – a bearish engulfing pattern was missed by merely 2 points. Index managed to test the 50% retracement around 4496 but it remains to be seen how it performs this month. In the absence of reversal signals, one can expect the bullish trend to continue.

During the week 38.36% of the stocks advanced while 60.49% declined. 1.14% remained unchanged.

Top 5 notable gainers were SELMCL, GUJNRECOKE, MICROTECH, PRITHVI and TATAMETALI while top losers were ELECON, HMT, DCW, ABGSHIP and KALPATPOWR.

To conclude, the Nifty is bearish for short term but still bullish for medium term.

Nifty review January 28, 2008

While many of us are surprised by way the market had fallen this month, there were early indications in the medium term charts. A bearish “three inside down” candlestick pattern had been formed during the week ending January 18. Since the beginning of the current bull run, the Nifty has lost about 14% during the month so far, next only to May 2004 when it lost 17.4%. The other huge fall was during May 2006 when it lost 13.7%.

It can be seen clearly that the medium term support has NOT been broken yet which is a good sign for the Nifty. A close below this line would mean that the Nifty is likely to form lower tops and lower bottoms, indicating bearishness. What we may need to look for is a confirmation of trend reversal, which could take at least two to three weeks. Medium term investors may have to stay on sidelines till then!

When we go through the daily chart of Nifty, we can find that it closed below its support trendline between November 21 and 23, indicating a possible reversal. Though a close above 6012 was achieved the rally was unsustainable. So was the case again, on January 4, Nifty once again broke the resistance but only to fall down! The bulls were trapped!! Clearly the index failed to close above the original support trendline.

Where is Nifty heading towards?

The harami candlestick pattern formed on January 23 failed to provide a confirmation in the form of a green candle and a higher close. Nifty has not made a higher bottom and higher top as yet. If we apply the Elliott wave theory, corrective wave ‘a’ appears to be complete; pullback wave ‘b’ is now in progress. When wave ‘c’ begins, it could be as large as wave ‘a’ or even 1.618 times wave ‘a’. This means that the short term trend is bearish.

Where are the possible supports?

Going by the medium term support trendline, the support should arrive between 4475 and 4500. However, if wave ‘c’ extends to the length of wave ‘a’ then we might see even further declines.

What to do in the current situation?

A bull market may give the investor 'profits’ while the bear markets impart knowledge. Learning tricks of the trade is very essential in any business. Stock markets are no exception. It’s better to wait and watch till the market becomes bullish.

The buzzing India stock market: Does it foretell a political change?

Note: This article highlights the past events in Indian political scenario and stock markets. It has to be viewed from a statistical and technical perspective and not from a political angle. The author has no association, membership or connection with any political party.

The Lok Sabha

Bombay Stock Exchange

India, the world’s largest democracy, has witnessed four general elections for the Lok Sabha since 1996 (Hindi = People’s Assembly, The Lower House of the Parliament of India). Currently, 543 Members of the Parliament are elected by the people and 2 are nominated.

Indian stock markets have been buzzing of late. After the US Sub-prime mortgage crisis (which is now forgotten by Indian stock market pundits, business television channels, financial newspapers etc.) there has been a near non stop rally in both Sensex and Nifty. On August 21, 2007 Sensex closed at 13989. Today’s close was 18658 i.e. the Sensex has gained more than 4600 points in 35 trading sessions. Every investor is looking for a correction but it does not seem to happen.

The India Street attempts to analyze the previous general elections of India and how the stock markets performed prior to the elections.

1996:

• The Congress party was defeated in the 1996 general elections and Prime Minister P. V. Narasimha Rao resigned.
• H.D. Deve Gowda resigned as the Chief Minister of Karnataka on May 30, 1996 to be sworn in as the 11th Prime Minister of India.

Let us analyze the daily chart of Nifty between January 1, 1996 and June 30, 1996.

Between January 29, 1996 and February 14, 1996 the Nifty witnessed continuous rise. Similar pattern is observed between March 26, 1996 and April 19, 1996. During these periods, Nifty gained 29% and 19% respectively. During the first run-up, one can see three trading sessions gaining more than 5%.

When the political change occurred i.e. United Front formed the government after Bharatiya Janata Party failed to prove majority, the stock markets did not react to this issue much.

1998:

The President of India dissolved the Lok Sabha in December 1997 and once again general elections were held in 4 phases during February and March 1998. Atal Bihari Vajpayee (BJP) became the 16 th prime minister of India on March 20, 1998.

However, the Nifty had a rally between May 29, 1997 and August 6, 1997 as can be seen from the chart below. It gained 25.9% during this period.

The eleventh Lok Sabha was dissolved on December 4, 1997 but the market had a smart rally 4 months before.

Even before Atal Bihari Vajpayee could assume office as Prime Minister, Nifty had a similar rally, as can be seen from the chart below.

During this “pre-election rally” Nifty had gained about 14.78%. Interestingly, it continued even after the new government was sworn in.

1999:

The BJP Government lost no-confidence motion by just 1 vote in 1999 and general elections were held during September – October in the same year, few months after the Kargil war against Pakistan. Vajpayee continued to be the caretaker Prime Minister till the elections were over.

• On April 26, 1999 Indian Parliament was dissolved.
• The Kargil war took place between May and July 1999.

Even as the Indian soldiers were fighting the intruders along the Line of Control in the Kargil district of Kashmir, the Nifty was climbing between May and July 1999 as can be seen from the above chart. It gained 45% during this period.

It is to be remembered here that the country was facing a political crisis. The Lok Sabha was dissolved and only the caretaker Government was functioning. Tensions developed between India and Pakistan over Kargil conflict. In spite of all these factors, Nifty gained 45%. Ultimately, BJP lead NDA coalition turned out to be winners and formed the next Government.

2004:

The NDA coalition recommended the early dissolution of Lok Sabha and on the advice from Atal Bihari Vajpayee, Dr A P J Abdul Kalam, then President of India, dissolved the Lok Sabha on February 6, 2004.

In December 2003, Indian stock markets were on a roll. Between November 20, 2003 (Close: 1522) and January 9, 2004 (1972) the Nifty gained 29.6%. Only two sessions witnessed a fall of more than 1% during this period.

After this dream run, a corrective decline started. The BJP lost the elections in May 2004 and the Indian stock markets witnessed heavy across the board selling between May 7, 2004 and May 17, 2004. The Nifty had lost 25% in just 7 trading sessions.

From 1389 on May 17, 2004, the Nifty has come up a long way, closing at 5441. The Sensex too, has crossed 18000 today. Most of the Index stocks have gained reasonably. Some have performed exceptionally well.

Conclusion:

Though there is no direct relationship between political scenario and the Indian stock markets, the available evidence suggests that the markets do run up expecting some political news (may be good or bad). The recent non stop buzz in the Indian stock market gives us a clue that the markets are headed for a medium term or even long term reversal. Having said that, investors should stay away from taking fresh positions if they feel that market movements are euphoria based rather than on technical or fundamental reasons. They can always find investment and trading opportunities once the market returns to normalcy.

Analysis of a Legend: Rakesh Jhunjhunwala’s Opinions

Rakesh Jhunjhunwala’s opinions on US and India stock markets

The India Street Analysis

Rakesh Jhunjhunwala is undoubtedly the greatest Indian investor. He has been active in Indian stock markets for nearly 22 years now. He has seen the ups and downs at Dalal Street. His opinions have been vivid and most of the times he gets those right. The India Street attempts to analyze his opinions on US and Indian stock markets.

Recently he was interviewed by CNBC – TV18. We present below our views on his opinions.

Q: From morning we have heard a variety of views on subprime and what impact it could have on India and emerging markets. What’s your take on it?

A: I think the impact of the subprime crisis is going to be far worse than markets are expecting today. I do not think Fed rate cut can solve the subprime crisis; I do not think that the US housing market is going to bottom for the next 24-30 months. I think the US economy will further slow; anyway at the moment the markets are quite elated with the Fed rate cut. Let’s see what happens.

TIS View: We have maintained that ‘crisis’ is the best opportunity to enter the market. For example, during the US Sub-prime mortgage crisis, the BSE Sensex touched a low of 13780 on August 17 this year. On October 12, it has made a high of 18845 or nearly 5000 points in just less than two months! In our article cited above, we have said that the media finds reasons to justify the market movements. A good example was seen in May 2004 when the Sensex lost 1259 points (5487 was the high on May 13, 2004 and 4228 was the low on May 17, 2004) but the political change was being termed as a crisis on that occasion. Now Sensex has gained more than 4 times from 4228 without any change in political scenario.

The markets move technically and nothing can really solve any crisis. We do know that the exporters of goods and services in India are badly affected by the appreciating Indian rupee. However, Reserve Bank of India has not intervened to depreciate the rupee.

In India, the latest real estate IPO stocks have done reasonably well despite the crisis. Read more about it in “Review of select real estate sector stocks”. One might argue that it is just in the short term these stocks have gone up. But we believe that even in long term the stocks might provide decent returns since majority have good fundamentals.

We certainly can’t visualize other sectors like engineering, fast moving consumer goods, capital goods, consumer durables etc. getting affected by the so called US subprime mortgage crisis.

Q: You been bearish on US saying that the bull-run over there has ended. We saw how this bubble has burst, the whole housing market is gone into a slump, and US stocks are down. What is your take on it?

A: The US market has not slumped; the Dow is nearly at a new high. The markets are perceiving that this problem will be surmounted, just like all other problems.

TIS view: We do agree that the Dow Jones Industrial Average is at a new high. Techincally, it has even a higher target. The monthly chart of DJIA is shown below (Source: Yahoo! Finance)

The DJIA has been bullish on monthly charts. It closed at 42.84 in April 1932 and after 75 years, it is trading above 14000. One can watch the ascending triangle breakout in DJIA in the above chart. The triangle height is 4728 points and the technical target works out to 16637. Interestingly, the DJIA has broken the resistance after 6 years and 8 months – a good decline and consolidation period.

Q: You expect more Fed cuts to keep fueling the markets going forward?

A: I do not know what kind of Fed cuts will happen, because inflation also has to be looked at. But I do not think the Fed rate cuts can solve this problem.

TIS View: The interest rates are often being cited as a reason for market upmoves or corrections. While this may be partially true in the sense more money will flow into stock market because of the reduced interest rates, the major movements are due to technical and fundamental reasons. Also, we have seen in various articles about stocks that are pretty bearish even in this great bull market. We may think of it as a function of demand and supply gap; the more people want, the higher the price they wish to pay for the stock.

Q: Our Indian markets, or almost all emerging markets are clued on to what is happening over there (US). Because of that, we are seeing heavy volatility coming into the markets. If you take a look at the past three days also, there has been heavy volatility?

A: I would disagree. About two-two and half years ago, the Sensex first crossed the Dow and today the Sensex is at least 20% higher than the Dow, in numerical terms. So you may have day-to-day reactions, but over a period of time you will decouple.

TIS View: Basically, volatility arises due to profit booking at higher levels or so called ‘value buying’ at lower levels. This is true for short term, medium term as well as long term. When the crowd thinks they had enough and wish to book profits, certainly volatility will step in. Same is the case when the market participants feel that they need to enter the market at some stage.

Q: From a longish point of view, what is your take on the bull run in India?

A: I think the longer-term bull market in India is very much alive.

The factors driving the bull market are alive and kicking and will be present in India for a very long time to come. Having risen from 3,000 to 18,000, we can always be prepared for corrections or some fall. Markets may not even go up for maybe another year. But I do not think the bull market is dead. We had a rise from 3,000 to 18,000 and if we consolidate and do not go up for a year or two, I do not think it’s going to make any difference to the long-term bull market.

TIS View: We certainly agree. As far as the indices are concerned, the markets may consolidate for some period (it could even be years like the DJIA) before eventually they make their further upmove. Having said that, we have to wait for a technical confirmation before we conclude that the bull run has ended.

Q: Do you think we are going to consolidate from now on and then only progress further?

A: I do not know whether we will consolidate. But even if we were to consolidate and not go up much or go down a little, the longer-term bull market will still be alive.

TIS View: As discussed previously, we have to maintain that the bull market will continue in the absence of reliable and strong reversal signals. That way, we agree with this as of now.

Q: We heard Chris Wood say in the morning that the Sensex target, the long-term CLSA target, is 40,000. What is your take on that?

A: I can only have some idea of the directions; I have no targets.

TIS View: The term target is used to project possible price levels a stock or index might reach after a bullish or bearish breakout. When resistances are breached, new highs are formed; when supports are broken, new lows are formed. Currently the Sensex is at its life high and it depends whether decline/consolidation pattern occurs and further breakout on either side. Each person may have his or her own target, but the stock or index has its own target!

Q: You been bearish on Indian IT for quite sometime now. What could happen to the US economy? When we talked to the tech companies, they say fundamentals have not changed, rupee is the only problem. What is your take on that?

A: Fundamentals today might not have changed. But if there is a big slowdown in the US economy, which I personally anticipate, then I think software will also come under pressure.

Earlier, we had all tailwinds for the software industry and in my opinion we have headwinds now. I do not say that software companies are going to go down. Although volume may or may not get affected, margins will be affected and therefore price earnings ratios can be affected.

TIS View: We analyzed Infosys Technologies Limited previously and found that it was bearish for short as well as medium term. We also indicated that the market is probably concerned about exchange rates, for which the company has no control.

Currently, the market participants are not interested in majority of the software companies. But there is an exception, Rolta India Limited, which has gained 145.50% this year. Infosys has lost 13.92% since January 1, 2007, followed by Wipro 19.66%, TCS 12.97%, Polaris 32.58%, Rsystems 56.56%. So, though the rupee factor has influenced many of these software companies, Rolta stands out as the winner!

Q: Midcaps have been very tepid over the past one-month. Is it just like in the middle of the storm? How do you see them bounce back?

A: I disagree. Midcaps are doing exceedingly well. I think 50% of all listed stocks have made new highs. So I do not agree that they have been tepid.

TIS View: True in some cases. Our medium term pick Adani Enterprises gained 62.63%, Engineers India 35.57%, RCF 22.79% in September 2007. Some pharamceutical and software stocks have not performed all that well.

Monthly Review of India stock market – September 2007

Indices break records; no respite yet for the bulls

The Nifty closed at 4464 on August 31, losing 64.85 points or 1.43% last month. The long lower shadow indicates that the lower side volatility was high i.e. attempt was made to push the index down but the bulls managed to close it near the open.

This month, the Nifty gained 557.35 points or 12.49%. In the last 12 years, the monthly gain for nifty over 12% has been achieved on 8 occasions, the last one being December 2003. Incidentally, a correction begain in January 2004 and in May 2004 Nifty lost 17.40%. In the monthly chart of Nifty shown below, there is still no sign of any reversal.

Normally, in the absence of any reversal signs, we have to conclude that the current trend should continue. But how long the indices will keep going up without a correction? Last month, the Nifty touched a low of 4002; the weekly charts show that it closed positive for 6 weeks in a row.

In the weekly chart too, there are no reversal signs. We need a pattern formation to decisively suggest that the market has reversed.

For Elliot wave count, some guidelines need to be followed. Few are given below.

• Wave 2 may be any corrective pattern except a triangle.
• No part of Wave 2 can more than retrace Wave 1.
• Wave 2 must retrace Wave 1 by a minimum of 20%.

After the Wave 5 completion at 4648 on July 24, a corrective decline began and waves a, b and c are marked on the daily chart above. Wave ‘a’ had a loss of 381 points, ‘b’ had a gain of 263 points and ‘c’ had a loss of 528 points. This is perfectly normal; it adheres to Elliott wave theory. When the uptrend started at 4002, we anticipated that a corrective decline may occur after 4530 which did not happen. Instead, the index was facing a sideways movment. If we strictly follow the rules of Elliot wave theory, it can be seen that:

• Wave 2 actually made a higher high compared to wave 1 (it should not have)
• Wave 2 did not retrace wave 1 by a minimum of 20% (it should)

These two discrepancies now lead to a conclusion that wave 2 has failed. This means that the market may no longer follow the Elliott wave theory for the time being.

A failed wave indicates uncertainty in the market. A decline can occur anytime but it is difficult to predict.

The daily chart for Nifty futures contract - October series has been shown above. The open interest has significantly increased, from about 18466 contracts on September 14 to 31,744,900 on September 27. This is another reason to believe that markets are likely to face a corrective decline.

Forecast for next month:

Traders need to be cautious. A correction, usually sharp, can occur anytime and it is wise to avoid big positions, particularly in Futures & Options segment since there is lot of uncertainty. However, there will be some investment and trading opportunities, particularly for medium term. Investors can enter those stocks at support levels.

Record breaking month:

On September 27, the Nifty closed at 5001. It took only 29 sessions to reach this landmark from a low of 4002.

On September 19, Sensex went past 16000 and closed at 16323 with a huge upward gap. Again, on September 26, it touched a high of 17074. Next day it closed at 17151. It is to be noted here that Sensex took just 5 trading sessions to reach 17000, which is the LOWEST for any 1000 point milestone. For more on these milestones, please read my earlier article, “Sensex hits 16,000: The India Street Special Report”.

The minimum number of sessions ever to cross 1000 points was in April 2006 when it needed only 19. Now it is even less than that, just five. But after April 2006, a huge correction occurred and Sensex lost about 30.5% in about 5 weeks.

The top 5 gainers and losers for the month among index stocks are given below.

Scrip	% Gain	Scrip	% Loss
REL	54.67	WIPRO	4.58
RPL	32.58	GLAXO	4.27
HDFC	27.83	HCLTECH	1.39
TATAPOWER	24.76	TCS	0.39
TATASTEEL	23.31	SATYAMCOMP	0.35

Stock of the week: State Bank of India

State Bank of India is the country’s largest bank. It is also the oldest in the Indian subcontinent. No other commercial bank in the world has more employees or branches compared to SBI. In India, it has more than 9400 branches; its assocate banks have 4000+ branches. Apart from this, SBI has presence in 32 countries and has 84 offices worldwide. It is the only Indian bank to feature in the top 100 world banks in the Fortune Global 500 rating (ranked 495 in 2007). A brief history of the bank is given below.

Business Profile:

SBI offers personal and corporate banking, agricultural/rural banking, NRI banking, international banking and government business services.

• Personal banking: Savings/current accounts, term deposits, housing/car/educational loans, demat services, foreign inward remittance, public provident fund

• Corporate banking: Trade finances, cash management products, fee based products, project finance

• Agricultural/rural banking: Crop loans, kisan credit cards, agricultural term loans, financing harvesters, dairy, poultry, horticulture

• NRI services: NRE/NRO accounts, term loans, home/car loans, foreign currency fixed deposits

• International banking: Trade/project export finance, merchant banking, correspondent banking, exporters gold card

• Government Business: Receipt of direct and indirect tax, government account, public provident fund, senior citizens savings scheme

SBI has 7 associate banks viz. State Bank of Bikaner & Jaipur, Hyderabad, Indore, Mysore, Patiala, Saurashtra and Travancore. These banks earlier belonged to the princely states of India. The government integrated these banks with the State Bank of India to expand its rural outreach. All the 7 banks use the same SBI logo of blue keyhole. SBI has more than 5600 ATM’s across the country.

SBI’s foreign offices focus on India related business and are located in Australia, Bahrain, Bangladesh, Belgium, Dubai, France, Germany, Hong Kong, Israel, Japan, China, Maldives, Singapore, South Africa, Sri Lanka, Oman, The Bahamas, UK and US.

SBI’s wholly owned subsidiaries and joint ventures include:

• Nepal State Bank Limited
• SBI Mauritius
• Indian Ocean International Bank (Mauritius)
• SBI Canada
• SBI California

Other SBI group companies include SBI Capital Markets, SBI Mutual Funds, SBI Life Insurance Company etc.

State Bank of India, California branch at San Diego

Financial Performance:

It can be seen that the net profits and EPS of SBI have grown consistently and more than doubled over the last 5 years.

The Central government holds 59.73% stake in the bank. SBI is a constituent of both Sensex (Scrip Code: 500112, free float market capitalization: Rs.42,721 crores, weightage: 3.83%) and Nifty (Ticker: SBIN, FFMC: Rs.84,226 crores, weightage: 3.61%). It is also listed at London Stock Exchange under the ticker SBID.

The monthly chart of State Bank of India Global Depository Receipt at London Stock Exchange is shown below. All prices are in USD.

Long term outlook:

On August 31, 1997 the stock closed at 283.65 and yesterday the close price was 1807. This means that the stock has appreciated more than 5 times. In the monthly charts, a negative divergence has been observed. Negative divergence occurs when security makes a higher top but a technical indicator makes a lower top. In this chart, we can see that the stock has made a higher low; but the slow stochastic indicator has made a lower low. This is a sign that the stock is likely to reverse. Since this has occurred in the long term chart, it is better to book profits at every high.

Medium term outlook:

In the weekly chart, higher high and higher low have been formed but the stochastic indicator had slightly declined at the consecutive peaks indicating negative divergence. Also, long upper shadows imply profit booking and higher volatility. Medium term investors too, may book profits at this stage.

Short term outlook:

In the daily chart, the stock had formed a bullish three inside up candlestick pattern on August 27. Watch the upward gap on the day after the harami pattern. This was the confirmation of trend reversal and the stock has managed to reach a high of 1889 from a low of 1407. On September 21, the stock had broken the previous resistance at 1799 but without much volumes, implying the trend will be weak. Also, a bullish engulfing pattern has been formed at the top of the uptrend near resistance levels; this could be a trap. The 21 day momentum has also gone down for three days in a row, indicating a possible trend reversal. The short term investors may also book profits if they already hold the stock; fresh exposures may be avoided.

Conclusion:

• Short, medium and long term investors may book profits since the charts suggest a possible trend reversal.

Weekly Review of the India Stock Market

Indices record new highs; but it’s time to be cautious

On September 18, the US Fed Reserve cut the key interest rate by half percentage point and many Asian markets were reacting sharply to this news.

Has the Indian stock market over reacted to Fed rate cut news? It appears to be so. The following table shows the points/percentage change in various stock exchanges across Asia. It can be seen that Sensex and Hang Seng (Hong Kong) were the maximum beneficiaries. The news made did not make much impact on Taiwan and China’s stock markets.

Exchange/Index	Points	% Change
New York (DJIA)	335.97	2.51
Mumbai (Sensex)	653.63	4.17
Hong Kong (Hang Seng)	977.79	3.98
Osaka (Nikkei)	579.74	3.67
Seoul Composite	64.04	3.48
Singapore (Straight Times)	116.61	3.35
Jakarta Composite	73.48	3.28
Kuala Lampur Composite	19.83	1.55
Karachi 100	174.94	1.35
Taiwan Weighted	26.47	0.30
Colombo ASPI	(18.29)	(0.01)
Shanghai Composite	(29.94)	(0.55)

AOL India reported that some caution is warranted in the near term. It read:

Sounding a similar cautious note, Arun Kejriwal of Kejriwal Research and Investment Services (KRIS) said, "It is a milestone indeed, but considering the way the market has gained the last 600 to 800 points, it makes us believe that something is wrong somewhere."

In May 2006, US Fed Reserve increased the interest rates for the sixteenth consecutive time by 0.25% to 5.25%. On this occasion, the Sensex lost nearly 31% in just five weeks time. But it went on to break its previous high of 12671 and go past even 16000.

Let us now analyze the daily charts of Nifty and Sensex and try to understand why a cautious approach is needed. Following table shows the points gained/ lost by Nifty and Sensex during the week.

Date	Nifty	Sensex
17-Sep-07	-23.35	-99.37
18-Sep-07	51.55	164.69
19-Sep-07	186.15	653.63
20-Sep-07	15.20	25.20
21-Sep-07	90.00	216.28

The Nifty closed at 4838, gaining 319.55 points or 7.07% for the week while Sensex closed at 16564, gaining 960.43 points or 6.16%.

In the last week’s review we anticipated correction since profit booking was seen at higher levels. But we did not rule out the possibility of indices going upwards since there were no reversal patterns or signals. As expected, the week started with a corrective decline of 23.35 points. However Nifty had broken its previous resistance at 4648 and closed above it for three days in a row.

Generally, when the market lacks direction i.e. at top and bottom, some “force” or “trigger” may help in deciding further movment. In August, the markets were in overbought condition and the US Sub-prime mortgage crisis acted as a trigger for a quick fall. This time, when everyone was looking for a correction Fed rate cut news made the markets move up higher.

Whatever the reason for this movement may be, now technically the indices have breached their resistances.

In the daily chart, we can see an “ascending triangle” breakout with a triangle height of 646 points. The technical target for this breakout works to 5294.

However, ascending triangle breakouts have a tendency to fall back and test the support levels. This can be seen from the weekly chart shown below.

It can be seen that Nifty, after breaking resistance has tested the support (earlier resistance) and after another upmove has fallen back to close below these levels. Going by this chart, the Nifty may very well fall below 4648 (see daily chart) and that possibility certainly exists. But that decline should only be used as an opportunity to enter Nifty futures.

The last time that Nifty gained more than 7% in a week was 6 years ago, during the week ending April 20, 2001.

In the daily chart of Sensex too, the bullish continuation pattern, ascending triangle breakout has occurred. The triangle height is 2089 and technical target for this breakout is 17958. Watch the huge upward gap on September 19. This long white candle was followed by a doji, indicating indecision among traders about further movement. However, a white (green) candle and positive close has nullified the uncertainty.

Forecast for the next week:

There is a stock market saying: “News based rally seldom survives.” Technically the market has already entered overbought zones; As discussed in the weekly chart, ascending triangles are likely to test their support levels; Nifty has made a high of 4856 (it touched a low of 4002 last month) and gained about 21.3% without any significant correction. Let us now wait for a confirmation next week about the reversal. As I have mentioned in my earlier articles, a confirmation is important while deciding about future price movements.

Abnormal movers during the week:

On September 19, even as indices were soaring to new highs, sugar stocks witnessed heavy buying following an announcement that Government may allow sugar mills to produce ethanol and sell directly. Sree Renuka Sugars gained 24.16% during a single trading session.

On September 21, Reliance Natural Resources (RNRL) gained 35.30% and 209 million shares got traded. The market speculated that the company is getting into gas distribution. Technically it broke its resistance at 41.65 during July 2007.

Advance / Decline Ratio:

Date	Adv.	Dec.	Unch.
17-Sep-07	539	583	28
18-Sep-07	782	346	25
19-Sep-07	679	453	25
20-Sep-07	453	667	32
21-Sep-07	467	668	21

Inspite of Nifty gaining 90 points on Friday, 57.8% of stocks ended up as losers.

Top Gainers / Losers among Index stocks:

Scrip	% Gain	Scrip	% Loss
RPL	18.55	SATYAMCOMP	2.73
REL	14.33	CIPLA	2.70
GAIL	13.37	WIPRO	2.57
SAIL	12.44	SUNPHARMA	2.40
RELIANCE	12.08	RANBAXY	2.14

Top Gainers / Losers in overall market:

Scrip	% Gain	Scrip	% Loss
STCINDIA	75.08	SUBEX	17.23
RIIL	74.21	TORNTPHARM	10.62
RNRL	51.43	AFTEK	10.07
WALCHANNAG	51.09	KPIT	10.04
UNIENTER	48.19	LOTTEINDIA	9.16