The Professional Ticker Reader

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Jan 30, 2005

Nifty 50 - an elliotician's perspective
Nifty 50 - an elliotician's perspective: Basic study indicates best is yet to come

On January 26 2005, we sent out an advisory to our clients stating that the markets were unlikely to be any more bearish and that the 1900 levels on the Nifty was a meaningful support was stated on multiple occasions - via sms, daily & weekend newsletters. While we kept recommending a hold on bullish positions ( sometimes even in violation of our stop loss levels ! ) to clients who were worried enough to call us, we were constantly going back to our calculations and found our reading to be bullish. We would like to share with you, the same analysis - past, present and future of the Nifty 50.

The fortnight that was

Admittedly, the fortnight was a worrying one and taxed all of our patience ! Markets fell too much, too fast and every time we felt the downturn was done with, came another fall ! We had a taxing time analysing the markets, taking client calls and handling public commitments. However, the experience was a learning process in itself. Here is what we observed -

More than half of our clients had taken up larger than usual positions in the markets. There was excess leveraging in the non-institutional segment, as we found from our media interaction
Most of the traders thought over-leveraging was ok ! That they would pay their brokers part payments and before the remaining amounts were enforced by brokers, the markets would rise and traders would encash their profits. No one was prepared to accept a fall in the indices !
Over leveraged traders presented the highest risk to the market upmove. They were not only ill-prepared financially to handle their existing positions, they had little / no spare cash for mark-to-market payments. When the slide started, they either bailed out of their positions on big losses, or started selling delivery shares in stark violation of principles of prudent investment.
On the other hand, traders who read, understood and implemented what we had written in our new year advisory " Outlook for year 2005 ", on the subject of how to trade in 2005 have done well for themselves. We clearly stated that in 2005, less trades would mean more - profits / losses. Since the markets were expected to move significantly, fewer trades on lower exposure would be sufficient for making above average returns. We also suggested going for high RSC counters, scrips with strong chart patterns and a few other " must do " points. These have stood well in the harrowing fortnight just passed.
Even trades initiated should be with a portfolio approach. If you are buying a future, make sure the long term chart is robust, then time the short term. Even if the events in the near term go against you, the longer term chart is ok, so your capital is sort of assured. The minute you attempt to milk the markets excessively, the reverse happens !!

Technicals

The daily chart of the Nifty below shows an interesting study on the basic understanding of the wave theory. The salient observations were -

1) Impulse wave 1 started on June 24, 2004 at the 1437 levels and extended to 1657 on August 10, 2004
2) corrective wave 2 started on August 11, 2004 at 1657 and extended to the 1573 levels on August 23, 2004
3) impulse wave 3 started on Aug 23, 2004 at 1574 levels and ended on Oct 6, 2004 at 1825 levels
4) corrective wave 4 started on Oct 6, 2004 at 1825 levels and ended at 1750 levels on Oct 26, 2004
5) impulse wave 5 ( final wave ) started on Oct 26, 2004 at 1750 and terminated at 2120 on Jan 04, 2005.

It maybe noted that the waves marked in the graphic above show a classic pattern of impulse / corrective waves. Since wave 1 & 3 are somewhat equi distant in their measuring move, the logical assumption was that wave 5 would extend. That explains why we were advocating bullishness even though some of us were expressing doubts over the sustainability of the upmove. However, there was a minor glitch - our computations pointed towards a correction at the 2155 levels and the same happened earlier. The fall that ensued was historically vicious in it's magnitude and rapidity. However, a deadly accurate picture emerged - a retracement calculation. A rise of 370 points was seen in wave 5 ( from 1750 to 2120 levels ), and therefore a 0.618 % correction was measured at 1891. This explains why we stressed at the 1885 - 1890 - 1900 support levels in the recent past. So where to now ? Read on....

Your future course of action

Traders with an eye for technicals should notice a few things - this correction from 2120 levels to the 1894 levels totalled 226 points. If the upmove is to commence, the Nifty must remain above the 2035 levels consistently. The traded volumes must be higher and the market breadth must be positive. In that case, the 2065 levels will be the next target and then the 2120 previous top will be the next stop. If a new bull run commences, and the Nifty stays above the 2120 levels continously, we foresee an exhaustion at the 2250 levels approximately. That is dependent largely on the budget and assuming there are no negative news flows. We will keep you updated on the same in due course.

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Have a profitable day.

Vijay L Bhambwani
Ceo :- Bsplindia.com

The author is a Mumbai based investment consultant and invites feedback at Vijay@BSPLindia.com and ( 022 ) 23438482 / 23400345.

SEBI disclosure - The author has no positions in the stocks mentioned above.

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