Special Note - Daily Market Trend Guide -- Monday, August 08, 2011

The Markets on Friday showed its worst intraday movement wherein the NIFTY went down over 200 points intraday, registering its biggest intraday fall over 200 points in its lifetime, though it recovered over 80-odd points from its day’s low to end the day at 5211.55, posting a net loss of 120.55 points.

Following very weak closing of US Markets on Thursday following its debt consolidation fears resulting into possible downgrade, the Dow Jones too had plunged by 500 points intraday. This has resulted into Asian Markets trading very weak on Friday opening which also significantly contributed to weak opening of our markets on Friday.

The downgrade fears or the possible downgrade of US was as such imminent and thus we had expected the Markets to open low and recover in the later part of the session. The Markets however recovered significantly from its day’s low but closed just above its opening levels.

Today, expect the Markets to give a knee-jerk reaction to the downgrade that has actually happened as the S&P downgraded rating on US from AAA to AA+, which US retained for over 70 years and this move is termed unprecedented. The S&P’s downgrade of US Sovereign Rating has come out of opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in S&Ps view, would be necessary to stabilize the government’s medium-term debt dynamics. This downgrade also reflects S&P’s view that  that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to larger than acceptable levels.

However, this has been challenged by US Regulators as it has pointed out a 2 trillion error in S&Ps calculation and have went on to challenge the very competence of the rating agency to understand the country’s financials.

HAVING SAID THIS, it is bound to have knee jerk effects in equity markets across the world. Following this, it is again likely to cause a  gap down opening in the Indian Markets and we might see the Markets opening lower again and react in a volatile manner to this development.

However, in midst of this mayhem, wherein the downgrade has come up when it was expected to have been averted by most of the analysts, the technicals of the Markets are expected to offer some resistance to the weakness as this event certainly affects in the immediate short term but remains an external one with the internals remaining largely intact.

With today’s weak opening expected, the Markets are expected again to open around its next support levels and the levels of 5116-5125 range. The levels of 5125-5100 are likely to act as one of the important support zone for the Markets.

All lead indicators point towards Markets being OVERSOLD. RSI—Relative Strength Index on the Daily Chart is 29.0871 and it has reached its lowest value in last 14-days which is Bearish. However, it does not show any negative divergence and it is now OVERSOLD as it trades in OVERSOLD Range. The Daily MACD continues to trade below its signal line.

On the Candles, A Long Lower Shadow has occurred. This is typically a BULLISH Signal especially when a Security is OVERSOLD and particularly when this occurs near a low price levels.

The development of a downgrade is certainly to cause some short term reactions / swings in the Markets but as mentioned above ,the technicals are expected to provide some cushion / resistance and again, like Friday, we might see the relief recovery in the Markets post initial lows.

Also, it is very much likely that post knee-jerk reactions that it may have, and which are unavoidable the Markets may see some relief recover, if not today, then in next couple of session as they remain grossly OVERSOLD and any weak opening further today shall be sending the indicators into heavy OVERSOLD range.

In light of above, though gap down opening and reaction to global negative developments cannot be avoided, at the same time, it is advised to refrain from creating fresh shorts as after the opening losses, it is doubtful if the Markets will have further intraday downside, and that too on Close levels. 

It is thus very strongly advised to maintain patience and refrain from creating fresh short positions. It is also advised to also refrain from fresh buying with intention to average the existing positions but PRESERVE LIQUIDITY to HOLD on to open positions.

Milan Vaishnav,
Consulting Technical Analyst,
www.MyMoneyPlant.co.in    
+91-98250-16331
milanvaishnav@mymoneyplant.co.in
milanvaishnav@yahoo.com