Update for 28th January 2011

    A Close Below the 200 DMA, But What Now ?

Following the formation of a bearish engulfing candle on last Tuesday, which indicated further weakness, Nifty futures made further losses on the derivative expiry day and closed below the 200 day simple moving average ( 200 DMA ). However, the February month Nifty future contract closed at 5730 for the day, almost coinciding with the 200 DMA of 5725. This author had indicated in the previous post that the derivative expiry might lead to further market pressures, especially because of the the heavy losses suffered by long position holders in the settlement. It was also indicated that the expiry might be between 5600 and 5700 as per the indications from the Nifty options open interest data. As indicated in the previous post, the market heavy weight Reliance broke the 950 support on Thursday and this factor also contributed for the market's close below the 200 DMA.

Nifty Futures - Intra-day Chart    

  

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.