Archives : ANOTHER MAY HEM. - 09/05/2008
Bear defines P/E ratio - The percentage of investors wetting their pants as this market keeps crashing.
for week-ended April 26 is at 7.61% versus 7.57%. The market had estimated it at 7.60%. India's wholesale price index rose 7.61 per cent marginally higher than previous week but inline with market expectations. The fact that the rise was not significantly higher than the previous week is consoling. Chances are that the inflation may calm down somewhat in the weeks to come. Inflation is the killer and many governments have fallen prey to high inflation.
GOVERNMENT FIGHTS INFLATION.
Government is fighting tooth and nails to bring inflation under check as this is the election year. Inflation is on a rise and the above 7% mark is here to stay. Another step taken by the government in combating inflation is that it has banned futures trading in soya, potato, rubber and chana. But chances are that this step will certainly not help in taming inflation but will certainly hurt country’s commodity exchanges.
Government in another regressive step to control inflation, talked to the steel producers and convinced them to reduce the steel prices. But the steel makers have urged the government to reduce input costs for making steel like coal, iron ore and manganese. The unwritten message is very clear that unless these prices are held under check, cost of steel is bound to go up and then the word that the steel producers have given to the government may not stand good. Another step is that the government has now turned its attention towards the cement producers. Another soap opera in the offing starring cement producers and the government.
Sensex opened the week at 17687, made a high of 17735, low of 16678 and closed the week at 16737. The weekly loss was 863 points. As a result of the weakness, the Sensex closed below the 200dma and the long term trendline. Thus the long term trend is bearish and we are continuing in the bear market. What we saw was a bear market rally. Bear rallies are very sharp and may rise far higher than expected and give the impression that the bull market has resumed and then immediately show its bear colours. Thus the bulls are trapped.
Now for the short term, the Sensex is correcting its rise from 14677 to 17735 and the retracement levels are placed at 16567-16206-15845. The first level of 16567 is coinciding with the gap left behind by the Sensex between 16570 and 16589. If this level is breached then the support at 16421 will be tested. This is a significant support as there is strong trendline support which is coinciding with the 50dma. On the higher side multi year trendline will create immediate resistance at 17178 and above which 200 dma at 17433 will provide stiff resistance.
Thus, for the week ahead the Resistance is at 17178-17433-17634. Support is at 16567-16421-16206.
Nifty opened the week at 5227, made a high of 5254, low of 4969 and closed the week at 4982. Thus the weekly loss was 246 points. As a result the Nifty has breached the 200dma and the long term trendline and closed well below these supports. Nifty is correcting its rally in the short term and the correction of this rally falls at 4981-4883-4785. The Nifty has managed to close the week below the level of 4981 and is now headed towards the next support at 4920. This is the area where the 50dma and the strong trendline support coincide. On the higher side, the multi year trendline is falling at 5022, which will provide sufficient resistance. Above that the 200dma, which is falling at 5167, will prove to a tough hurdle to surpass.The MACD is giving a sell signal but it is still in the positive zone. The RSI has already started falling and the ROC is running southwards and is perilously close to run in the negative zone. Danger sign is being flashed so better watch out.
Thus, for the week ahead the Resistance is at 5022-5167-5271. Support is at 4920-4877-4785.
HOW TO TRADE?
The answer is best not to trade and stay away from the market. Those who know derivative strategies should use them and hedge all long positions. One can construct a Bear Spread for the Nifty. Or buy PUTs for the index.
One alternative strategy is to construct a pair strategy. One can buy CNX IT future and hedge it by selling Nifty future. It means that we are assuming that the IT sector will simply outperform the broader index i.e. the Nifty on a rupee neutral basis.
THIS WEEK S RECOMMENDATIONS:
ITC 218 SL 213 TGT 225-229.
WEBEL-SL-ENERGY 350 SL 335 TGT 373-384-397.
NICHOLAS PIRAMAL 344 SL 336 TGT 354-363.
BASF 225 SL 217 TGT 236-247.
TODAY’S WRITING 78 SL 75 TGT 84-88.