Wednesday, May 4, 2011

Daily Market Trend Guide -- SPECIAL EDITION -- Wednesday, May 04, 2011

A SPECIAL NOTE 

The Markets yesterday reacted violently, and in fact more than necessary to the RBI’s announcements of hike of 50 BPS of repo and reverse repo rate and NIFTY lost over 130 points from its day’s high to close near the low point of the day  breaching important technical support levels of 5600 to close at 5565.25 and in the process have formed a sharply lower top and lower bottom on the Daily High Low Charts.

Today, expected the Markets to open on a flat to mildly negative note and look for directions. It is expected to trade with capped losses in the very narrow range in the initial trade but overall it is high time, both technically and statistically, that we see some respite from the continuing weakness that we are seeing.

With the Markets expected to open on a flat to mildly negative note, the levels of 5638 and 5690 are immediate resistance levels and the levels of 5530 and 5510 are expected to act as support. The RSI—Relative Strength Index on the Daily Chart is 36.7626 and it has reached its lowest value in last 14-days which is bearish. However, it does not show any failure swing. The Daily MACD continues to trade below its signal line.

At this point, it is important to take a judicious note of few things. First of all, NIFTY has saw a  steady decline of over 325 points in last couple of sessions and this has sent the Markets very near to OVERSOLD range. Along with this, this fall has come with massive addition of Open Interest in both NIFTY and Stock futures. So was the case yesterday as NIFTY Futures added over 17% in Open Interest. Given this reading, even if we remain in overall downtrend, a technical pullback is almost imminent and is LONG OVERDUE.

Secondly, reaction to RBI’s action is not judicious as, what RBI did, i.e. rising rates by 50 Bps as against widely expected 25 Bps should be in fact be seen as direct and aggressive attack on inflation. Taming of inflation is only the long term robust remedy to sustain “healthy” growth in the long term. The revised estimates of GDP growth has not been significantly lowered at 8%.  It is obvious that RBI’s stance would continue to that of rolling back fiscal stimulus (lowering of rates) that  it gave to support growth in times of global slowdown and it is doing no sin if it is rolling it back to tame inflation, which is becoming cancerous and dangerous in the long term health of economy. The worry that rise in savings interest rates by 0.5% will make the funds costlier is almost discounted in  current prices now as all the components of BANKNIFTY are almost OVERSOLD.

Thus, it is all important to view this developments in overall judicious manner. No growth remains a healthy growth with uncontrolled and sustained inflation.

To sum up, all the developments that we have had in last couple of days, have been more or less discounted in the current prices. The Markets are seeing artificial pressure as it totally disregarded its important Pattern Support levels as well as other important supports like its DMAs.

All and all, it would be important for the Markets to move past the levels of 5600 again to avoid any further weakness. It is IMPORTANT to take note that any weakness today shall make the Markets OVERSOLD. It is strongly advised to refrain from taking any short positions as it is just a matter of time that we shall see a technical pullback, even if we remain in overall downtrend. From today onwards, any weakness that persists should be seen as an opportunity to make selective fresh purchases.

With the Markets seeing massive addition of short positions which is evident with heavy addition of Open Interest with the fall of over 325 points, a point of reversal in imminent in the Markets. Thus, a  cautious approach with positive optimism is advised for today.
 
Milan Vaishnav, 
Consulting Technical Analyst, 
www.MyMoneyPlant.co.in 
+91-9825016331 
milanvaishnav@mymoneyplant.co.in 
milanvaishnav@yahoo.com

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