Markets: Have they given a breakout?

It was a news filled truncated Diwali week. Diwali is over and now is the time to look ahead. Lets try and see what possible road the market takes ahead.

1. The RBI policy as expected hiked rates by 25 basis points. The fine print was that Savings Bank Interest Rates have been de-regulated. This has potential to erode the profit margins especially of large private banks. Yes Bank immediately offered 6 pc Interest rates on Savings Account. This is a drag on the private sector banks.

2. Europe crisis has been averted by the Private Banks taking a 50 pc haircut on their loans. If it was Greece alone, then crisis would have been averted. What happens when Italy and Spain default. Politically it is a master stroke by China. They have agreed to give funds but the first losses would be borne by the European governments. China's role as a World power has gone up several notches. This development heralds the shift of political power towards Asia. Earlier, China was an economic power, now political influence follows.

3. Our markets have filled the gap at 5350 - 5215 and this was broken by a gap up. This is also known as Island reversal provided there is follow up buying. We now run into a wall of resistances around 5400 - 5500 with 5470 being a key resistance on multiple parameters.

4. The crisis has not been solved, its only delayed. 5450-5500 also represents the trend line joining the tops from 6339. This should be taken out on a weekly basis, to herald a fresh bull market.

To Summarize, we are in a powerful bear market rally. Only a close above 5500 on a sustainable basis would foretell a fresh bull market. We are just 150 points away from a breakout. We wait and we watch on the sidelines.

For those interested in Stocks Picks and Gold, Lakshmi has her Investment Cherry Picks and Gold Rush on offer.

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Markets: What next?

The markets lost a further 2.7 pc to close down at 5073. This is on the back of further negative news from Europe and US, a sharp spurt in Gold prices, good IIP numbers and FII selling.

1. The FIIs have sold almost 11000 crores this year ad 7000 crores in the first fortnight of August. The DIIs have picked up almost 20000 crores of shares this year and about 6000 crores in August. The market is down about 17 pc YTD. It is clear that the market dances on FII tunes. If the rupee weakens and the FIIs pull out cash, the market will go down.

2. Gold has given a breakout and is a buy on dips. As the currencies of the world weaken and the debt crisis increases, gold will go up.

3. SBI had a poor set of numbers. The NPAs are increasing and also the Rate Hikes look set to continue. Avoid the autos and the banks.

4. We had good IIP numbers and yet the markets fell. Why was this? This is because good growth means the RBI can hike the rates further to tame inflation and afford to sacrifice some growth.

5. Looking at the Elliot Waves, we are C wave from 5944

Wave 1 was 5944 - 5196 = 748 points
Wave 2 was 5196 - 5741 = 545 points
Wave 3 was 5741 - 4946 = 795 and ongoing.

Wave 3 should end this week and get set for a rally of about 450-500 points on the Nifty.

6. The band 4750 - 4900 has a confluence of supports and should hold for the present moment.

7. The gap area of 5204 to 5323 will act as a strong resistance. This gap getting filled up is the first sign of a bounce.

8. Open Interest points out to support at 5000 levels and resistance at 5200 and 5300 levels.

Strategy for the Week:
Historically for the past few months, the markets bounce towards end of expiry and hence cut shorts around the 5000 levels and be prepared for an expiry around the 5200 - 5300 levels.

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How the European Woes Affect All of Us

Over the last few weeks, Greece and the so - called PIIGs countries of Europe have been under the spotlight. Let us examine what is the European Union, why the debts of certain member countries are a threat to all and the way going forward.
The roots of the European Union can be traced to the period after the Second World War and the rebuilding of Europe. For those who are interested in reading further, wiki has interesting nuggets:
http://en.wikipedia.org/wiki/European_Union
The EU has a membership of about 27 nations. It is somewhat like Federal Structure of India where weak states are subsidized by the stronger states. This is the reason why in India, the so-called BiMaRu belt ( Bihar, Madhya Pradesh and UP) even if they were not doing well earlier, the other states made up for it.
Now, Greece, Spain, Italy, Ireland and Portugal have ran up huge debts mainly due to lack of earnings and huge spending.
The confidence in Greece's ability to pay up led a run on their bonds (debt). No one was willing to lend to Greece as they thought in case of a default, the institutions issuing the debt would loose their money.
If there was no Euro, and the Greece Drachma, the problem would have been limited to Greece, there would have been sympathetic noises made and the world would have moved on. Greece is part of the EU and has the currency Euro.EU cannot allow its member nation to fail in debt obligations, because that would mean the end of the Euro and the EU. No one would trust the Euro anymore.
The problem further stems from the fact, that the stronger countries like Germany were not too willing to bail out Greece. The reason? Taxpayers of Germany feel why should the Greeks party and we pay the bill for the party.
The same situation prevails in the other PIIGs nation. The following image got from the web, shows the magnitude of the debt.
The problem with the EU and the Euro is that it is an artificial nation and currency created without clear cut mechanisms, to cut fiscal deficits.
Now, how would this EU crisis affect other nations:
1. EU has 21% of the World's GDP. It is the largest trading partner to the countries like China and India.
2. A weak Euro hurts exports from India to EU.The margins get hit. If there is less demand in EU, the exports get hit anyway. Prime example our Automakers namely Maruti and Hyundai exports big volumes of cars to EU.
3. The Dollar Index has already moved up to 86 from 74. A strong Dollar means the end of the Dollar Carry Trade and the hot money moves out from the Emerging Economies and moves back to the US.

The next few months and how the EU crisis pans out will show us where our markets will go.
To think of it, it was only in last year where the talk was that that the Euro would replace the USD as the world's premier currency.

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