Update for 17th January 2011

 

     How Far Can the Market Go Down ?

Some of the Investors and traders might be curious why such a negative headline as the above one is being used on this site when so many investors and traders might be having heavy losses.  Well, let  this author make it clear !  It's not about being negative. It is just the outcome of an attempt to become neutral, objective and also to avoid the foolish bullheadedness. Let me make it clear once more with some explanation. Markets are falling now because of the simple reason that the markets went too far or overboard on the way up and was not actually supported by the fundamentals. Even after the fall of about 12.5 % from the highs, Nifty index is still quoting at a relatively high historical trailing price earnings multiple of 22.5 as on 14th January 2011. It is a simple fact that this level of high valuations is not sustainable on the face of slowing profit growth. Readers interested in a simple analysis of long term historical trailing valuations of Nifty index may click here to check out the Nifty Fundas page on this site. Further, if anyone is still not happy with the explanation for the fall, suffice it to say that these outcomes were twice discussed and the necessary warnings were made on this site in the posts dated August 22nd and September 9th of last year.

Coming back to the original question - How far the markets can go down, the correct answer is beyond the reach of anyone at present. Therefore, let's check the charts of various time frames to reach a best guessed answer to this question. But, let's check out the latest market action first.

We had indicated in the last post that "according to the available indications so far, the chances of the market breaking the 5700 mark is higher than a recovery from this level for various reasons. "

 

Nifty Futures - Intra-day Chart 

Nifty futures opened flat on last Friday and fell to the previous low of 5700 in the initial stages. The last ditch efforts of the bulls resulted in to a short covering ( ? ) rally of 160 points from the low. This rally again failed at the first level of resistance at the 5850 to 5865 area. The slow correction started from there became another deluge of selling. Nifty futures and the major indices easily broke through the November lows and have closed at new three month lows even in the weekly charts. 

Nifty Futures  - Daily Chart 

Some interim supports for Nifty futures are available at the following levels. The reasons for selecting these levels as  supports are also given after the levels :

   ( a ) 5600 - 200 Day Moving Average or DMA,

   ( b ) 5550 - the previous high before the channel breakout,

   ( c ) 5450 - the middle of the previous 200 point trading range before the breaout and 

   ( d ) 5350 - the lower boundary of the previous trading range mentioned in ( c).  

The immediate higher resistance are at 5725, 5775 and 5865 levels. 

S&P CNX Nifty Index - Weekly Chart

The weekly chart of  Nifty index covers a period of an year. It also shows the breakout above the upper boundary of the year long trading channel which occurred in September 2010 at around the 5550 - 5600 levels. Market rallied hard after the breakout and reversed from an upper boundary line drawn at a similar height of the original trading channel. In the last two or three occasions when the index came back to the now middle boundary, it took support there and rallied. However, market has broken through this support as on last Friday. In the meanwhile, it has also formed a lower high pattern. The upper boundary of the old trading channel ( now, the middle line ) may act as a resistance line from now on, if the market is unable to move above this line in the very near term. Moreover, the odds of Nifty Index falling and reaching the lower boundary of the old channel ( presently at around the 5200 levels ) in the medium term have risen as of now. This medium term target is not given as a trade recommendation but only as a possibility.  Even if the market reaches the target in the medium term, it might reach there only after considerable back and forth trading over a period. However, this scenario can be negated if the market rallies and goes back in to the upper trading range in the near term. 

    Nifty Options Scene  

The January series Nifty options Put Call ratio  decreased further to  a very  bearish looking 0.71 times as on  14th January 2011. Following the Friday's fall , the India VIX  increased to 23.81, up 2.85 %. Significant  additions to the January Call options ( or call writing ) were seen at the 5600 and  5700 strikes. The highest number of Nifty Call option OI is still at the 6200 strike. Some additions to Put option OI were seen at the 5500 and 5600 strikes. The highest open interest ( OI ) of Put options has remained at the 5600 strike as on Friday.  This option OI data seems to suggest that the previously indicated  move down to  the 5600 strike is on now.

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 22.50,  3.57 and  1.10  respectively as on  14th January 2011. ( 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 :

The Momentum Signal has closed with a value of -100, indicating maximum negative momentum for the sixth consecutive day. 

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  17th 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 !!!

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