Tuesday, July 21, 2009

Clustering Of Important Events Indicates Caution Ahead - Tanmay G Purohit

A Bit Of History To Start With:-
Sensex hit its fearsome lows at 7697 and many could not foresee the bull run ahead as markets abounded in predictions about 5000-Sensex which never happened. Since that time only we have been bullish about India and trying to make people aware of the importance of that opportunity through various majors. An upper circuit was predicted right to start with (http://tanmaygopal.blogspot.com/2008/10/now-probability-of-upper-circuit-is-big.html) which happened after 7 months after elections, then we reflected on how SEBI and other regulators were trying to improve the sentiment (http://tanmaygopal.blogspot.com/2008/11/i-have-not-committed-crime.html), the risk-reward was perfect at 9000 sensex also (http://tanmaygopal.blogspot.com/2008/11/why-to-fear-even-if-sensex-does-6000.html), then came Satyam Episode but India still remained investment favourite 

Now Into The Present:-
Sensex hit 8047 which is current rally bottom on 6Mar2009 and rallied nearly 93% to reach 15600 on 12Jun2009. The P/E of Nifty has expanded from below 12 in October'08 to above 20 now and a lot of pessimism has ran away as euphoric phase took over after UPA won the elections. Almost all the sectors have contributed to this rally and many stocks have more than quadrupled also. Some caution is advised at this point as valuations look stretched, markets can run up even with stretched valuations but now the risk-reward is not favourable after indices have nearly doubled themselves. Long term investors need not worry (2-3 years and above) but short-term traders/investors may feel pain if they don't take informed decision at this point of time.
  • Sensex/Nifty will complete 89 days of rally on Tuesday, 21Jul2009, 21 weeks of up trend will be complete this week - Both are important fibonacci numbers in technical parlance. 
  • Sensex has created 9 up gaps during its journey in the last 5 months of rally, also on weekly graph we are having 3 up gaps open. It is not necessary that we close these gaps always, but closing these gaps can give us a comfortable entry point which is needed for future safety of returns. If Sensex tries to feel even 2 gaps from the 9 open, we may see 13460 levels. If 2 of the 3 weekly gaps are to be closed, we may see even 12250.
  • 61.8% retracement of Sensex fall from 21206 to 7697 will complete at 16045 which can be a place where good supply can be seen.
  • RELIANCE results will be out on 24Jul2009 and 80% of the results will be announced over next 8-10 days which can guide further direction to the market. Any disappointment in any of the major results can be a cause of worry as high expectations are built in.
  • Biggest Solar Eclipse of the century and it is one of 3 eclipses in a single month. Now I am not an astrologer to talk about this, but this is one event which needs a close watch as effects can be a bit late also.
All these events cluster together and such rare events encompassing a single week can give way to major turns, it may not be visible immediately and it is difficult to comprehend effects at this point of time but it is better to stay away or stay light as we have taken good profits since markets bottomed out in Oct'08. Technically, Sensex sustaining above 15000 levels can take it to above 16000 and more also very quickly, but it is the risk-reward which is not favourable at this juncture. PCR (Put-Call Ratio) is rising rapidly since last week as there is heavy built-up of shorts and government announcements after budgets regarding various reforms have infused fresh money into stocks. Shorting is not advisable, this is only a caution to investors. The bearish Head & Shoulders formation in Nifty has also failed so more short covering is not ruled out. There is a good chance that we may be wrong as the fall may not materialize soon and we may just become onlookers for higher levels, but if we are right, the correction from current levels can be big which can be 25% or even worse also on index.

Deja Vu 21000 - Similar caution was advised around 20000-Sensex levels in Dec'07 but we did see a rally of 1000 more points from there also. We can never sell at exact top, it is not necessary to wait until last point of rally as when one really wants to sell the market may not oblige. So take profits now, reduce positions and better to watch the events by avoiding over-aggression. In technical analysis, we always talk about probabilities and never certainties but if there is a high probability of turning around, one should have it in mind before investing. If we go up from here and rally doesn't stop, we can again catch it as we will be having cash in hand to do that, we can always take a fresh view later.

Gaps so far:-

About the big Eclipse:-
The world will witness the longest total solar eclipse of the 21st Century on Wednesday, 22Jul2009 as it will lay a carpet of darkness across India and China, from Mumbai to Shanghai. At its maximum, this will last 6 minutes and 39 seconds. Earlier, similar solar eclipse occurred on July 11, 1991 which lasted 6 minutes and 51 seconds. This solar eclipse is the longest total solar eclipse that will occur in the twenty-first century, and will not be surpassed in duration until June 13, 2132. This is second in the series of three eclipses in a month. There was a lunar eclipse on July 7 and now a solar eclipse on July 22 and then a lunar eclipse on August 6.

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