Short covering RIL-ADAG patchup not able to take Indian stock markets up - 25th May 2010

Sunday brought a much suprised good news for Indian economy in a form of patch up stitched between two warring brothers and owners of two major business houses of the country- Reliance Industries and Anil Dhirubhai Ambani Group (ADAG).

Indian stock markets too reacted positively to the development and had a gap-up opening of about 1.5% each. The markets further made their way up and at one time Nifty was trading above 5000 mark which gave hope to the participants of a consolidation around those levels. But with soft opening in European bourses, markets started loosing its ground and finally closing the day at 4943.

The provisional data released by exchanges indicate selling of around 1000 crores by FIIs, though, it is ably supported by a buy of around 1100 crores by Domestic Institutional Investors (DIIs). It should be noted that FIIs have already sold equities worth 11000 crores in the month of May, which should be a concern for the Indian stock markets.

Another positive factor that might have drived the markets up was "Short-covering". The markets have lost almost 7-8% in this month and it was widely expected that some of the short positions in May series will be covered which can help Nifty move beyong 5000 levels. The initial part of the day saw some of the shorts being covered, but Europe soft opening triggered the fresh round of short positions created in the markets. Though, there are certain indications of short covering happening around 4930-4950 range, which should act as mild support for the markets.

US markets have opened up soft and European markets too have been trading in a narrow range. If the trend persists, we might see a flattish kind of opening for the markets. 4870-4890 should act as a good support level for the Nifty. On the upper side, 5030-5050 acts as a strong resistance. For tomorrow, traders should maintain caution and wait on the sidelines till markets take a definite trend.

If Nifty able to breach 4870 levels on the downside, then traders can open short positions with stop-loss of 4925 and target of 4770. Whilst if Nifty goes up and breaches 5030 on the upside, one may sell Nifty with Stop-loss at 5080 and target price of 4925.

No stock-specific recommendations for now. The previous recommendations for Maruti, Sterlite and Cipla remain intact.

Before we close the article, a note of caution. Many a times we try to do bottom fishing especially during times when markets seem weak and suddenly we see markets rebounding and we end up with nothing in our hands. By now we all know that markets are weak. Almost every analyst is giving bolder levels on the downside. JM Financial has even talked about Nifty @ 4100 in the medium term. But the fact remains is "nobody knows it". Hence, it is advised to pick good quality stocks at every correction.

Another piece of statistics before I close the article. In last one year Dow Jones has actually outperformed Sensex by around 10%. Seems strange!!!! Yes... But its true....

Wishing you a great trading day tomorrow!!! Good night...

Short covering likely to drive Indian equity markets up, but caution advised at higher levels - 24th May 2010

As we have been discussing for last two days, Indian Stock Markets have rebounded strongly from their support levels (Nifty: 4850) on Friday. From its lows of 4840, Nifty rebounded strongly to reach the target of 4925 comfortably and closing the day @4931.

Overnight closing on Dow Jones has been good and we may expect Indian Stock Markets to open at decent note on Monday morning. As it is expiry week, hence it is likely that we might see some degree of short covering coming into the markets which may take Nifty close to 5000 levels, where we may see some fresh short positions built in again. The important resistance levels come at 503-5070 range. If this range if breached on closing basis, we may see Nifty going till 5200. But the probability of this happening is unlikely as global factors are still competitive.

Fundamentally also the recession in Europe will likely to affect almost every major weight in Nifty, thus, valuations may not justify too much upside from the current levels.

Thus, it is advised that traders may go long on Nifty within the range 4920-4950 with a target level of 5040-5060 and stop-loss can be placed at 4870. Once Nifty breaches 5040, one may switch to "sell on rise" strategy where one may sell Nifty in 5040-5060 range with stop-loss at 5160 and target price of 4750. Hence, the risk-reward ratio becomes really lucrative in "Sell-on-rise" strategy.

We had advised traders to buy Maruti in 1190-1210 range on Wednesday with target of 1350 and stop-loss at 1140. The stock has rebounded strongly from 1170 to close on friday at 1240. Fundamentally also, the stock is currently trading at attractive levels and can be bought from long-term perspective.

Technically, Sterlite Industries has entered the strong support zone from where it is expected to take a short term bounce. One may buy Sterlite Industries in 620-640 range with target price of 680 and stop loss of 605. Similarly, one may buy Cipla in 316-318 range with target price of 330 and stop-loss of 305.

Options traders can sell Nifty 4400 Put and Nifty 5300 Call for June series with stop-loss at 5350 on the upside and 4350 on the downside.

Before I adieu, I would like to remind everyone that atleast Indian Stock Markets is still in structured bull phase. We are not as leverage as we were in 2007 that further accentuate the fall. We have come out better than the others from the grip of recession. Though the support drivers for the markets to go up are still not intact but downside too is limited. Henceforth, one may try to adopt stock specific approach and buy good quality stock during corrections.

Wishing you a great investing day and the coming week!!! Hopefully, we again meet with big smile on our faces.. He ha ha :)

Indian Stock Markets looked weak but entering the strong support zone - 20th May 2010

It seems yesterday's discussion seems more relevant for today's post. The support level of 4850-4800 on Nifty didn't tested today, but chances are omnious that it will surely be tested tomorrow when markets open. Dow Jones is currently trading more than 2% down (250 pts). If this weakness persists overnight, then we might see ateast 100 points gap down opening and put market in our set support-zone of 4850.

FIIs data doesn't give encouraging picture either. Foreign Institutional Investors have been net sellers of more than 600 Crores while Domestic Institutions were net buyers of Rs. 700 Crores. Amidst the Nifty, Public Oil Production companies like Oil India, ONGC were up by around 8-9% while IGL was down by 5%.

Over a longer term, investors have some good reasons to be cautious. The recession has gripped the European markets and hence, strategies of some Indian companies to move to Eurozone at the time of US recession seem backfired and hence, profitabilties are likely to hit for several front line companies in Nifty and Sensex. Similarly Asian economies have now been suffering from Inflationary problems which are the offshoots of loose monetary policies adopted by governments during the midst of global recession.

Hence, long term investors need to adopt a stock specific approach and try to concentrate on companies that work on domestic theme and away from inflatonary pressures. One such company is FDC. FDC is a pharmaceutical company that works in the field of Opthalmics and Oral rehydration salts. Electral that we all might have consumed at the time of dehydration is company's flagship product. Besides the company has expanded itself into other areas and pushing its growth plans steadily. The company's exposure to overseas markets is insignificant. The stock is currently trading for Rs. 90 and can be accumulated at around 83-85 Rs (25%), 78-80 Rs (25%) and 70-72 Rs. (50%).

Derivative traders may go long on Nifty around 4825 levels with stop-loss of 4780 and target of 4925. If it breaches 4775 on the downside, one may create fresh short positions with target of 4700 and Stop-loss of 4825.

One may also adopt Pair strategy wherein one may buy Nifty @ 4850 and sell Bank Nifty @ 8980 in te ratio 2:1 i.e., one may buy two lots of Nifty around 4850 and sell one lot of Bank Nifty @ 8980. The target levels for Bank Nifty is 8680 and for Nifty is 4925. If any of these breach, one may close both the positions and book their P/L. On the reverse side, one may close the position if Nifty breaches 4775 on the downside or Bank Nifty reaches 9400 on the upside.

Its a testing time for everyone related to stock market, but one should not drive its money on emotions and rather try to derive their decisions on price and valuations.

Wishing you a great trading day tomorrow!!!!

Amidst the panic, stock markets enter strong support zone - 19th May 2010

ndian Stock Markets, after a stable gap down opening, slide steeply in the latter half of the day and end the day with losses of more than 3%. Provisional data for today indicates strong selling from FIIs @ 1300 Crores. Among the losers, high beta stocks in Nifty like ICICI bank, Sterlite Industries and Tata Motors have slid more than 7%. JP Associates hit its 52-week low of 120 Rs.

The current level augment that markets are now entering the panic phase now. Till the time, Nifty remained above 5000 levels, there seemed a hope that markets will gradually recover and some buying was seen around 5000-5100 levels. But once these levels have been breached, the only way markets finding themselves going is "DOWN".

Amidst such scenario, whats should a trader do now? If we think rationally, Nifty should find some strong support @ 4800-4850 levels. Till the time, markets remain above 4775, there are strong chances that markets can recover till 4950. Hence, traders can now go long on Nifty tomorrow (if markets have gap-down opening) at around 4850 with Stop-loss of 4775 and target of 4950.

Options traders can play on reverse-straddle tomorrow selling both 4800 Call and Put. This should fetch around Rs. 200. One may keep a stop-loss @ 4600 on downside and 5000 on the upper side.

Amongst the stocks, Maruti @ 1200-1210 levels. The stock is currently at its absolute base of last 9 months and should act as a strong support level. One may keep a stop-loss of 1140 and target price of 1350 on the stock. Fundamentally also, the stock has come to the decent levels.

Anyways, time is surely test the nerves of several traders and chances are ominous that short-sellers may find themselves stuck in no-win situation. So temptation to go short should be resisted as market enters its strong support zone of 4800-4850.