NIFTY View for the Week - 21Nov2011-25Nov2011

Recap for the Week: 

The rampant Bears ripped through the Bulls & by doing so it was a one way traffic where in the the Benchmark indices closed 5.09% down.

Performance of Global Indices & Commodities in the past week:

One always tends to look for a reason that led for a fall/rise of such magnitude (At least I do - You can call it a post-mortem if you like). 

Few of the reasons that come to my mind are as follows:

1. Weak Global Cues. Fear in Global Markets that Italy might be downgraded by rating agencies.
2. Currency Depreciation (USDINR hitting 32-month lows of 51.23). High Bond yields (Due to High Inflation)
3. There was also a rumour floating around that even India's Sovereign rating may be downgraded. Not sure how of this is true, so please take this with a pinch of salt if it indeed doesn't happen. But if indeed it happens then it would be very bad for Equity (Stocks would plummet, & Bond Markets (Yields would rise leading to bond prices falling further) & even the Currency Markets (Indian Rupee will depreciate further against USD, EUR, GBP etc.) will suffer.

Some of the above points have been taken up in detail below-

• Major cause for the markets performing so badly (to outperform its peers on the downside) being our Currency, Indian Rupee (INR). Rupee hit 32-Month lows of 51.23 to the Dollar. Rupee in the past year has lost 14% of its value. As per Equity master, Rupee is the worst performing currency in Asia & 3rd worst among all the currencies of the world.

USD INR Exchange Rate - 1 Year Chart

• Whats leading this slide in the rupee? Aren't we the country that is tipped to be growing at 8%-9% over the next few years ? Aren't we the leader of the Emerging Markets Wagon - "The BRIC". Here are few major factors that is hurting the Rupee -  
• High Inflation & in turn High Interest rates - Due to this the Industry profitability is getting hurt & this is making India story not so lucrative enough for the Foreign funds to invest here. So when these funds decide to look elsewhere, there are no Dollar inflow (Selling Dollar to Buy Rupee to invest in Indian Markets). Other being when the Foreign funds start to take out money from our country (They convert their Rupee amount to Dollars - Meaning Sell Rupee to Buy Dollars).
• We are currently in a phase of No Demand (Buying Rupee to Selling Dollars) & Huge Supply (Selling Rupee to Buy Dollars) for our currency. To speak in terms of numbers from mid July'11 to mid Nov'11, Rupee has weakened from 44 levels to 51 levels (16% in just less than 4 months in a Currency markets is a huge move). 
• What this has meant is made our Imports dearer. Oil is our major imports & our Oil Import Bill has soared & come last day of Feb'2012 when the Budget would be announced for the next Fiscal (2012-2013), We all will be in for a Nasty surprise when it comes to the Fiscal Deficit for the current financial year (Apr'2011-Mar'2012). Wont be surprised if we have the Fiscal deficit at 5-5.5 % of GDP.
• Now, Can't government do anything to cut this Fiscal Deficit percentage? Yes they can.  Fiscal Deficit by definition means the Net of Expenses & Income - In simple words its the difference between what government earns to what government spends.  With our home currency (Rupee) depreciating so much, the earning of the government has gone down as less tax collection & also the expenditure (Primary Deficit) - raising money by selling bonds has gone up. The yields of 10 Year G-Sec has gone above 9%, this is not a surprise as even the 91D & 364D yields are in the range of 8.8-9%.
• Government can reduce the fiscal deficit by going through with its Divestment option (Divesting its stake in PSU's - ONGC, OIL, SAIL, NBCC FPO all are lined up to hit the markets but Equity Markets being at such low levels government is reluctant to divest in such times (Rightly so). So these divestment can happen only say the next Fiscal or if situation improves probably during the last quarter (Q4 of FY11-12). This route could have been a major route to reduce the deficit but the situation is just not right for the action. As even if Government divests it has to divest at 52 week lows (Stock prices of these entity), & it also means government would get far less money in  return.
• What others things the Government can do is to ask the Central Bank (RBI in case of India) to intervene in the Currency markets  by selling some of its (~ $ 315 Billion ) dollar reserves to buy rupee & indeed provide some support. But our currency reserves are not that high for RBI to keep doing it all the time & can turn out to be a quite riskier exercise. for now RBI is not intervening that much & is just taking a close look at the situation.
• Are there any measures you think of the Government can do in current situation?  Please share (Gyaan Baatne Se Hi Badthaa Hain - Knowledge Improves When You Share it With Others)

*BRIC is an Acronym for the Emerging nations - Brazil, Russia, India, China)

Index Highlights:

• In the last weeks post - Nifty Weekly View, it was pointed out that NIFTY is making a Descending Triangle Pattern (Bearish Pattern) & if it did break 5168 on closing basis then things could get worse & can lead to a fall. Honestly I had not expected NIFTY to breach the supports of 5168 on Weekly closing basis. But that's Markets for you - they make their own moves. Markets broke 5168 levels decisively on monday & continued its southwards journey. 

Weekly Chart:

Daily Chart:

Weekly & Daily Charts Observations:

• Target was not disclosed in previous post. Target for the pattern would be the Height of the Triangle (6338-5168=1170). That would mean 1170 points to be shaved off from 5168 levels. This would take us to NIFTY levels of 3998 to be precise. The levels look crazy at this juncture, but keep a close tab & see if indeed we will reach that levels or not. The major supports below 4700 are at 4400 & 4200. Below 4200 we are most likely to test the Golden Gap (I call it Golden Gap because it has not be revisited for close to 2.5 years now). This wont be a one way move, we may halt at any of the support levels. But remember this pattern would get invalidated if NIFTY manages to close above 5168 (Candle formation to be above) on Weekly basis.
• NIFTY for the week lost close to 400 points but closed 263 points down at 4905. On Daily charts, Friday saw a Hammer Candlestick formation (This indicates if the lows of Friday is not broken (4837.95 the low on Friday) at least for short term we can have a meaningful pull back to the levels of 5000-5025. 
• OI Data for the November Series suggests the 4700 Puts has 52.91 Lakhs of OI followed by 4800 Puts at a OI of 59.6 Lakhs & the 4900 Puts at 54.06 Lakhs. These can provide cushion for the indices on any downside as the Put writers are confident that Indices wont go below 4800 levels this expiry. On the upside 5000, 5100 & 5200 Calls have 52.6 Lakhs, 58.6 Lakhs & 71.08 Lakhs of OI. These levels would remain tough for the indices to cross on the upside.
• Indicators: 
• Daily & Weekly Stochastics are at opposite ends. On Daily charts the Stochastics is at Oversold levels & on Weekly charts the Stochastics is starting its downward journey from the Overbought levels. What does this contradicting signal mean? It would mean we can get a pull back of 2 to 3% & post that Index would resume its journey southwards.
• The Weekly MACD Line is about to go below the Signal line, this would be bearish as MACD is a lagging indicator & it would more or less confirm that the down trend wont be changing soon & there is more room for downside.
• Bottom Line:
• Only a small positive in all this move that happened is we took out the previous high of 5169 & closed at 5399 (Couple of weeks back). So by doing so we made a Higher High. Now it remains to be soon how far we can guard the 4720-4740 levels to make a Higher Low. 
• It's the Futures & Options Expiry Week. Expiry on last Thursday of the month (24th November 2011). So the next four trading days one can expect a lot of volatility in the indices. 
• Last expiry we saw the bulls were in charge & on the Expiry day the short covering led the index to eventually break a crucial resistance of 5168 & expiry happened above 5200 levels. There was no unwinding done by Short sellers on Nifty Futures. Hence the rollover was very high. But Bears managed to pull the index down in this series. For taking positions on either long or short side,  keep Friday Close & Friday Low in mind. Immediate Resistance for NIFTY in any further upmove would be the Gap-Area created on Friday Gap-Down Opening. The Gap Area is 4964-4928.

Supports & Resistances - 4661 <- 4740 <- 4838 <- 4905 -> 4960 -> 5000 -> 5050

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