Thursday, January 27, 2011

Update for 27th January 2011

   Another Derivative Expiry !!!

Some pointers :
  • A raise of 25 basis points in the interest rates was expected by the market. But why did the markets sell off on last Friday ?
  • RBI has almost abdicated it's responsibility to control inflation by it's act of raising the expected inflation rate to 7 % and doing almost nothing about it except for the prescription of some mild medicine.
  • RBI has dented it's own reputation as an inflation fighter. The central bank has even confirmed that the current inflation cycle will be a long one requiring further hikes down the road.
  • Here is some proof for the ineffectiveness of the rate hikes and of the lethargy of the banking system. The YTM ( yield to maturity ) of 10 year Government securities was quoting at 8.15 to 8.20 % last Friday. Deposit and loan rates of most banks are not much higher than the YTM. Normally, it should be much higher than the YTM of gilts.
  • Need further proof ?  Bankers are crying foul about the lack of deposit growth. Means they are pricing it very low !  And loans are flying off the shelves. Same meaning ! Borrowers are getting the loans dirt cheap !
  • Inflation not only robs the ordinary people but even the corporates.
  • An example : Hindustan Unilever declared it's results on last Friday and the stock sold off by 5 %.  ( Please see the chart below. )
  • Hindustan Unilever is a cash rich company which is just struggling to pass off the high raw material prices.
  • But what happens to other corporates who have heavy borrowings ?
  • They will be negatively  affected on more fronts like raw materials, wages, interest rates etc.
  • In short, corporate profitability growth will suffer.
  • It seems Reliance stock at a three month low might decide the immediate direction of the market. If the stock breaks the 950 support, it may take down the indices lower just because of it's 9.58 % weigtage in the Nifty index. ( Please see that chart below ).   
Hindustan Unilever ( Inflation Victim ) - Daily Chart

Hindustan Unilever has broken it's 100 DMA support at around the 298 levels. It has support from the 200 DMA at around the 275 levels. The lower supports are at 250 and 225 levels.

Reliance ( What Now ? ) - Daily Chart

    Reliance has under performed the market right from the last general election results. The stock has been on the back foot recently for the lack of progress in the ramp up of natural gas and also because of the rumours of an impending consent settlement with SEBI just like the settlement made by the ADAG group companies. Reliance is testing it's support at the three month low at 950 now. The next lower supports are at 920, 900 and 850.  The stock has upper resistances at 1000 and at the1025 to 1035 range.  

    Nifty Futures - Intra-day Chart     

    Though Nifty Futures traded above the resistance of 5775, it could not sustain above it. Therefore, market itself has reinforced this resistance once more. As pointed out in the previous post, some firm closes above this level will be the required confirmation for the resumption of an uptrend.

     Nifty Futures  - Daily Chart     

    Friday's sell off has lead to the formation of a bearish engulfing candle in the daily chart. Nifty future is still supported by the 200 DMA at the 5625 levels. A break of the support offered by the 200 DMA will confirm the resumption of the down trend.  The lower supports are at 5550, 5450 and 5350. Market may become highly volatile in the second half of trading on Thursday because of the pressures of the derivative expiry in which the long positions have suffered heavy losses.

      Nifty Options Scene 

    Following the sell off in the market, the January series Nifty options Put Call ratio ( PCR )  decreased further to a still comparatively very low and bearish looking 0.62 times. However, the February series PCR seemed to be normal. The India VIX  also increased to 20.78, up 3.02 %. Significant additions January Call options, were seen at the  5700 and 5800 strikes. The highest number of Nifty Call option OI is still at the 6200 strike, even though many lower strikes from 5700 and upwards have significant OI outstanding. Some  significant covering of Put option OI were seen at the 5800 and 5700 strikes. The highest open interest ( OI ) of Put options has remained at the 5600 strike as on  Tuesday. This option OI data seems to suggest that market participants are expecting an expiry between 5600 and 5700 strikes at present. However, the unusually low PCR may still leave open the chances for another sharp downwards move by the market.  The January series Nifty Option Pain chart also depicts a similar picture showing the lowest option pain  corresponding to an expiry between 5600 and 5700 at present.

    Nifty Option Pain Chart - January Series

    Nifty Trailing Fundamentals     

    The trailing Price Earnings Ratio  ( PE Ratio ), Price to Book Value ( PB Ratio ) and Dividend Yield ( DY Ratio ) of the Nifty Index  were at 21.96,  3.59 and  1.10  respectively as on  25th January 2011.  Readers may please note that some decrease in the PE multiple is possible at present, due to the increasing profits figures being reported by the corporates in the quarterly results season. ( More information and a long term analysis on Nifty historical valuation are available from the "Nifty Fundas" page ).  

    Latest Ultimate Momentum Signal

    The updated Momentum Signal spreadsheet showing the latest signal values of the current month Nifty future and the Nifty index is given below :

    Following the sell off, the tentative buy  indicated by  the Momentum Signal has been negated as on Tuesday.

    Projected Momentum Signal Close Values

    The projected levels of Momentum Signal values applicable to various ranges of closing values of the current month Nifty Futures, Nifty Index and the BSE Sensex,  as at the close of next trading day, ie. as on  27th January, 2011, are given in the following table. All readers are requested to take note that the table below is just a ready reckoner for the next day's Momentum Signal values and the figures are not intended to be interpreted as any targets for the Nifty futures or indices shown therein.

    Please click on the table to enlarge. For more info on the above table,  please click here.
    Readers are requested to go through the Risk Factors, Risk Analysis, Position Limits and FAQs pages to gain a reasonable understanding of the trading system. Please do post your  comments and suggestions on how new  posts can be made more useful.
    Cheers and Prosperous Investing and Trading !!!

    To access and/or download  the free online Position Limit Calculator click here.

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