Weekend Reading - Psychology Drives Markets!

Here is an entertaining story about how strongly psychology can affect a market. It is from the book "The New Gatsbys" - It takes place at the Chicago Board of Trade.Soybeans were sharply higher. There was a drought in the Illinois Soybean Belt. And unless it ended soon, there would be a severe shortage of beans. . . .
Suddenly a few drops of water slid down a window. "Look," someone shouted, "rain!". More than 500 pairs of eyes shifted to the big windows. . . .
Then came a steady trickle which turned into a steady downpour. It was raining in downtown Chicago.
Sell. Buy. Buy. Sell. The shouts cascaded from the traders' lips with a roar that matched the thunder outside.
And the price of soybeans began to slowly move down. Then the price of soybeans broke like some tropic fever.
It was pouring in Chicago all right, but no one grows soybeans in Chicago.
In the heart of the Soybean Belt, some 300 miles south of Chicago the sky was blue, sunny and very dry.
But even if it wasn't raining on the soybean fields it was in the heads of the traders, and that is all that counts.
To the market nothing matters unless the market reacts to it. The game is played with the mind and the emotions.

Nifty woes

Nifty has formed a rising wedge in Daily graph which is a bearish pattern to develop. Trades near resistance line around 5500. Breakdown below 5350 would signal a downtrend ahead, at least for short-term.

RSI is showing negative divergence –

14-Day RSI shows lower highs against higher tops in Sensex which is a bearish divergence. Any time such divergence is seen Caution is advised as prices may reverse their trend. In such formations a breakdown is normally awaited and 5330-5350 is a support area below which Sell signal would be clear.

SBI - Channels play

SBI has been showing many channels in recent past and below is a weekly graph for the same. Every time there is a break from channel, the trend reverses.

Now it is showing a rising Wedge which is a bearish formation and stock has been resisted at Rs 2500 levels which must be crossed to go higher. Stock trades at Rs 2430 and any break below Rs 2330 stock would reverse up trend. 

RBI policy to be watched on Tuesday 27 July and bill for Government cutting stake in SBI is pending Parliament nod as per news reports. Q1 results would be watched, technically weakness is seen in the stock which can impact overall market too.

Weekly Nifty Update 24 July, 2010 by Tanmay G Purohit

Nifty has closed at 29-month high and this week it was up 55 points at 5449. Gains were led by METAL and TELECOM stocks which bounced back after recent correction – TATA STEEL, HINDALCO, IDEA and BHARTI rose more than 5% each. BPCL fell 4% after reports that Government may not share revenue losses of Oil Marketing Companies for first quarter. Select banks – KOTAK BANK, PNB were top losers.

Q1 result season would end this week and important results would be – STER, NTPC, LT, RELIANCE, HINDUNILVR, DLF, M&M, JINDALSTEL, HERO HONDA, ONGC. The combined net profit of a total of 339 companies rose 25.5% to Rs 22428 crore on 17.8% rise in sales to Rs 152120 crore in Q1 June 2010 over Q1 June 2009.  Volatility may rise this week as traders roll over positions in the derivatives segment from July 2010 contracts to August 2010 contracts.

India's merchandise exports rose 30.4% from a year earlier to $17.75 billion in June, imports grew 23% to $28.3 billion and deficit is widening faster than exports which is a worrying sign.

The annual monsoon rains were 17% below normal in the week to 21 July 2010, improving after a 24% deficit in the previous week, the India Meteorological Department said on Thursday, 22 July 2010. The seasonal monsoon rains during 1 June to 22 July 2010 were 12% below normal, the weather office added.

Mutual Funds have been net sellers for quite some time while FIIs have been buying Indian stocks - Foreign funds have bought net Rs 6053 crore this month so far, till 22 July 2010, as per data from the stock exchanges while Domestic funds have sold shares worth Rs 3539 crore in the same period.

The food price index climbed 12.47% whereas the fuel price index rose 14.27% this week and Prime Minister's Economic Advisory Council C. Rangarajan said fertiliser subsidy bill must come down and diesel prices could be freed once inflation begins to come down.

Monsoon session of Parliament to start from Monday 26th July and it is expected to be an active one as matters like fuel price hikes, rising inflation, Bhopal gas tragedy and Indo-Pak talks come up for discussion. The key event this week is the RBI's quarterly policy review on Tuesday, 27 July 2010 - Analysts expect another 25 basis points rate hike aimed at anchoring inflation expectations which looks already discounted in the market.

TELECOM stocks IDEA, BHARTI, TATA COMM, ONMOBILE, MTNL have underperformed but now look good for short-term rise. POWER stocks NHPC, NTPC, NEYVELI, PTC, ADANI POWER and JSW ENERGY are safe bets for investors and these stocks may not correct much if markets start falling. ADANI POWER, NHPC and SHRIRAM TRANSPORT are included in F&O and these stocks would remain active in short-term.

Technical View:
Nifty has closed comfortably above 5400 and it would remain strong as long as 5350 is maintained. This breakout if sustains, can take Nifty towards 5525/5640 soon. Regular profit-taking is advisable with many events lined up this week such as F&O Expiry, RBI Policy and major results.

Stocks looking good: JSW ENERGY, JYOTHY LAB, SATYAM COMP
Weak Stocks: APOLLO TYRE, HDFC, RCOM 
Supp 5350/5294/5210 Res 5525/5640/5700

JINDAL STEEL & POWER - Confluence of bearish patterns

A technician has to be cautious about longs when we see bearish patterns and double alert when there is a confluence of bearish formations. The example below would illustrate my point:

This is Daily Chart of JINDAL STEEL & POWER which is listed on NSE. As we can see the stock was having a swift up trend but the trend line got broken and stock has gone into consolidation mode, moving in a range. This is a rectangle pattern which is both a “Reversal” as well as “Continuation” pattern i.e. prices may break down and reverse the uptrend OR if the break out to the upside, the previous trend of higher prices would continue.

Rectangle also indicates prices moving in a defined support and resistance level and moving below or above that with volumes drying up and indecision increasing as pattern develops further.
Now this stock has more interesting things to note – There was a gap down day just in the middle of the rectangle which hasn’t been filled yet.

Also we see a bearish Head & Shoulders formation inside the Rectangle; the H&S is yet to break down though. Rs 600 has been like a Steel support for the stock and if it closes below this level for 2-3 sessions it would be a breakdown from both Head & Shoulders as well as Rectangle pattern.
If the breakdown below Rs 600 materializes, downside target can be below Rs 480-500 for this stock after that.
PDF : http://www.4shared.com/document/Kqu3lh1T/JINDAL_STEEL_200710.html