The Professional Ticker Reader TM

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March 25, 2005

Is the bull market dead ?

Retracement pattern studies don't indicate so

A lot of concerns exist among the investors about the state of the markets and whether the bullishness in the markets have run their course for now. While the upmove is running into selling resistance at higher levels, technical studies do not point towards a termination of the bullishness just as yet. We have attempted to analyse the state of the markets in this piece.  

The last 10 sessions have tested the patience of the bulls and have caused much consternation among the f&o players, especially those who are caught on the wrong foot. The scenario is similar to the first half of January 2005 when the markets surrendered a good 8 - 10 % very rapidly. A majority of the leveraged positions were surrendered after abject dejection and the long players were taken to the cleaners. While the possibility of an encore cannot be ruled out, the important thing to note here is that the damage to your portfolio / open trading book is directly proportionate to your leverage factor. Our investors will recollect that we had specifically advocated moderation in our advisory note at the beginning of this calendar year stating that in 2005, " less will be equal to more ". The logic behind this guidance was simple - since we expected the markets to make larger moves, smaller positions initiated by our investors will be sufficient to generate large profits / losses. The calendar year 2005 is clearly NOT a year for aggressive, indisciplined and trigger happy traders. Click here for reading the 2005 outlook.

While a variety of reasons can be attributed for the fall in the markets, the sum and substance of the situation is your capital is eroding and margin calls ( in case you are leveraged ), are more a rule than exception. The psychological pressure that these situations can exert are unfathomable.

Under the present circumstances, there are two ways forward - a) trading approach & b) portfolio approach. We go through the details -

a) Traders approach - the markets are falling, that's all you need to know. Dump your emotions and your positions, go with the flow and short the markets. Whether you choose to play the same stock that you are / were holding long or hedge against some other securities, that is immaterial. You are committed to recoup your losses and take a fresh view on the situation when clarity emerges. While this approach is likely to yield superior results in the absolute near term, we feel, it will force you to digress from your medium / long term view and catch you unawares whenever the turnaround occurs. You could salvage the situation now and take a hit later. The risk involved in this approach is high.

b) Investors approach - this approach is a mature and patient approach to handling the current situation and is likely to exert stress in the immediate future but will ease matters in the medium term. We have seen with past experience that after taking a significant hit on their investments, traders / investors get dis-oriented and undergo a sense of shock / trauma. Logical decisions no matter how sanguine they maybe, seem impractical. A sense of withdrawal from the markets is a direct result. That is a situation that all seasoned players know how to avoid in adverse circumstances. In case a temporary setback has occurred, you have the avenues open like writing options, buying puts / calls, resorting to exotic / synthetic strategies to salvage the situation. Booking losses too often will mean that you are struggling too often to get your capital back to where you started from ! However, there are situations where you need to cut your losses and run, and you need to determine whether you are in that situation. A practical understanding of your current situation is a pre - requisite. The capital involved in this approach is high.

A few words of advice - if you are invested / have leveraged long positions in scrips where the long & medium term charts are still bullish / intact and the relative strength comparative vis-a-vis the indices is high ( our investors will recollect that this study is a standard feature of our special edition - "Flavours of the week " ), you should witness a revival in your stocks rapidly. It's only the short term waves that are turning negative, which tend to correct more rapidly. Watching the open interest ( O.I. ) and the traded volumes on these counters will be another worthwhile proposition.  It is essential that you must hold a fixed portion of your trading / investment pool amount in ready cash to meet contingencies like the present scenario. In case your personal finance allow it, average the high RSC / low beta counters, but in a pyramid fashion. Just as a pyramid gets broader near the base, your averaging should get more aggressive as your scrips near significant threshold levels. For example - buy 100 shares @ 500, buy 200 shares @ 490, buy 400 shares @ 480 etc. This way, your acquisition cost tends to be near the current market price ( CMP ). As a special service to our investors, we are going to provide you support and resistance levels of select frontline counters on a regular basis to provide you investment decision support systems. The same can be viewed in your respective plan subscribers area.

Technicals

As we have been pointing out in our daily newsletters, the short term charts indicate that the Indices will get support at the 2004 and the 6380 in the absolute near term. These are threshold levels of 0.618 % retracement of the upmove from Jan 27 2005 which ended in March 2005. While these levels are not holy cows that will not get violated, immediate supports exist on the Nifty at the 1963 levels. This support is meaningful from two angles. The trendline in the weekly chart below shows a support there and a 1.618 % retracement of the entire upmove after the post budget rally that ensued also points towards this level being a support. The third support at the 1900 levels is a significant one and will provide many whipsaws, false signals and choppiness after which the trend determination process will be amply clear. Wave theory enthusiasts will understand that the rally from 920 + levels to the 2017 corrected nearly 62 % in May 2004 and resumed it's northward journey in June 2004. The 2116 levels were 0.618 % extension of the prior upmove if calculated from the 1439 levels. We saw a temporary profit taking in January at the 2120 levels ( 4 points away from this calculation ) and a weak resumption above the 2120 in March 2005. Even if the current wave from 1439 levels in June 04 was to be of the same magnitude as the previous wave between May 03 - Jan 04, the 8 - 10 month target is 2500 and above. Traders should simply watch out for signs of violation of major support levels till then.

º The immediate support is at 2004 levels which is the 61.8 % retracement of the upmove from Jan ' 05 from 1894 levels. That is the first leg of the support. º It is apparent that the trendline that marks the rally from the May 2003 from the 920+ levels provides support to the Nifty at 1960 levels. That is the second line of support. º The 1899 - 1900 levels are a major support as the same coincides with the major multiple resistance on the Nifty between Jan - April ' 04. Once these levels were overcome in Oct ' 05, they will act as a support on the downside. That is the third line of support. Traders may note that the uptrend is intact even if the Nifty sinks to 1725 levels !!

Our outlook remains positive on the markets in the medium / long term and we term the current correction in the markets as an above average development.

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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