Thursday, June 18, 2009

Bubble of Belief

In a well thought out report, Albert Edwards, a strategist at Societe Generale says:
"Rallies in commodity prices and mining-company shares stem from a “bubble of belief” in China’s economy that is likely to burst"
“I believe we will look back on the Chinese economic miracle as the sickest joke yet played on investors,” Edwards wrote yesterday in a report. To support his argument, he cited falling earnings at the country’s industrial companies.
“The bullish group-think on China is just as vulnerable to massive disappointment as any other extreme example of bubble- nonsense I have seen over the last two decades,” his report said. “The fall to earth will be equally as shocking.”
Full news item at Bloomberg

My Notes: That is exactly my problem with the rally in India. In last three months, suddenly the economy has become "This time it is different" . It is never different. A slow, steady rally with lot of base building may have set the foundation for a multi year bull market. Instead, all over the world, we had a rally driven by "liquidity". That is why, I call this move an "up trend" and not a bull market. This one will end, we just do not know when. It could end at 6500, 5500 or even has done its bit at 4700 - no opinion yet.

Comments
Gulshan asks:
"I am regularly reading your blog and tying to follow the same.Now I have a doubt and I think you can answer my question.My question is whether today, the nifty has breached swing low of 4365 or not?Please reply as your Yes or No will certainly help me a lot because I don't have enough experience in trading."

My Answer: YES

I mention this one because reading this early morning has made my day.

Vipin says:
Dear Sir,Your early morning positional call on CNBC gave superb returns intra day.Excellent analysis.

My notes: Thanks for taking the time to write. I appreciate it.

Head and SHoulder or Cup and Handle?
Vinod D writes:
In the monthly Charts of Nifty Iam seeing an inverted Head and Shoulder pattern in the making...with the neckline around 4700 and bottom of right shoulder at 3800. So Iam expecting nifty to go to 3800 in the coming months and to break 4700 after 3 to 4 months...If that happens then nifty could head towards 6500. Is my analysis correct...Iam a novice in tech analysis....If iam wrong please teach how to identify the correct H&S pattern if you have time..."

My Notes:
Yes. This is the same pattern which has been referred to as "cup and handle". The difference will be: the cup requies a shallow retracement to complete the handle. The H&S pattern should ideally see the Nifty slide down to 3800 - in symmetry with the left shoulder. So far I agree with your analysis. But what about the rest of what you write? You expect the Nifty to go down to 3800, why? Why 3800 and why not 3500 or 3150? or, why not 4330? The H&S pattern is relevant only when the right shoulder is complete, and price break out above the neckline. Till then, we watch it with academic interest. My point is: An incomplete pattern does not tell us what the market is likely to do.

Gofi has some interesting numbers:
"1. Nifty has gone UP for 8 months from october lows.
2. Nifty has gone UP for 34 Weeks since october lows.
3. Nifty has gone up for 144 days since october lows to 4600 levels.All the three numbers 8, 34, 144 are fibonacci numbers.
Based on these data, is there any to predict for how long nifty will correct ?"

My Notes:
Sorry. I am not into this kind of analysis. If some readers can answer this, please drop a comment.

7 comments:

men said...

Mr. Sudarshan,
In the past you have been saying buy into the dips, does that still hold good, and can you give us sl for the same.
Thanks,

A Student for Life, of Life (and of Markets) said...

Sir,

Gulshan's comment is very appropriate and illuminating. Thank you Gulshan. Here is a slightly different analysis related to positional trading using WMA. The summary is that yesterday Nifty has closed below the lowest value 20 day WMA line indicating more than a 50-50 probability of the beginning of a downward "wave". ( Sir, I learned about "waves" from one of your earlier post.)

My analysis can be read here

Student of Life
stockmarket-methods-in-madness.blogspot.com

Sanjeev said...

Is Stoploss the only method to cut the loss ?
Can we use other alternate method in lieu of stoploss? Pl. Help.

stockchart said...

respected sir,a few days back ,i requested for your guidance about the RISING WEDGE pattern on nifty charts,i didnt get your guidance ,but i think ,the same pattern has worked in last 4 days fall,your opinion please..charts were here... http://bhoom2tika.blogspot.com/2009/06/rising-wedge-on-daily-charts.html regards bjnaik@hotmail.com

Prasanna said...

Sir
I always read all your comments , thanks for increasing our knowledge abt trading. In continuation with ur post on "Bubble of belief" , I woould like to share another thought . Pl go thru this link :http://correspondents.theatlantic.com/conor_clarke/2009/06/an_interview_with_paul_samuelson_part_one.php

Prasanna

CHANDU said...

Great work sudarshan ji,Ur suggestions are valuable,ur previoues post about money management is good.
"plz start some basic technical course online" nothing more we cant expect from u.

Regards

Vinod Dhandapani said...

Thanks for your reply on H&S. As expected Nifty went down and I took the money out when Nifty was around 4600. Few days back when Nifty was trading in the range 4500 - 4650 the analysts in CNBC was saying 'Buy on Dips', I thought the sentiment was bullish. Twice I bought Nifty around 4500 and made good profit. Last week I bought Nifty at 4440 thinking it was a dip and lost money (third time unlucky). One of the analyst said that Nifty could go to 4100 and you can buy at that level...Now after the last week's fall, the same analysts are saying 'Sell on Rallies'...I felt bearish and didn't buy when nifty was trading around 4200. How to interpret these two statements as a positional trader - 'Buy on Dips' and 'Sell on Rallies'.

Thanks
Vinod D