Thursday, May 20, 2010

Shock and Awe - this time in reverse

Just 10 days ago, on Sunday night, the full might of Governments in the Euro zone was on display when the one trillion dollar bailout was announced. The principle was: use a bazooka to disarm the pessimists. It worked for one day when markets opened 3 to 4 percent higher. Quickly, the shock and awe was replaced by uncertainty.

Now comes shock and awe in reverse. Mr Market, or Ms Market to be politically correct, is not a collection of governments. The Market does not have powerful weapons. It is only the collective judgement of market participants - a David in front of Govt Goliaths. But the Market feels that this bailout recovery is no good, there are problems in Europe and China which will affect the world. Therefore, in its wisdom, the Market has decided to stay away from risk assets - equities and commdities.

Now, dear readers - open the chart of any midcap which has seen a rally in the past 12 months. Just to pick a random example, I open up Themis Midcare - a stock that rallied from 48 in feb 2009 to 300 in April 2010. Suppose a normal 61.8% retracement were to take place - then the pullback will be155 points, bringing the price down to 145. This is the story with all midcaps, smallcaps, and, many large caps.

Proof: Technical Analysis works:

I have ben consistently bearish on Educomp. I have nothing against the company, my sense was that valuations were high, and, around 800 its price chart also started saying the same message. Since then, this has been my favorite sell. Today, the stock was quoting at 500. Now where can it go? I leave this as an exercise to readers. Open a weekly chart of the stock and check out the starting price levels and the peak which it touched in 2009, fourth quarter. What is the possible retracement?

I say that credit for this analysis goes to technicals because while I was bearish, I heard many fundamental analysts go overboard in their praise for this stock. In fact, the same story applies to Hind oil Exploration. When the share price was going up, TV anchors (not Udayan & Mitali, who are probably one of the best business anchors in the world) were high flying singing praises of the share. At 350, I suggested that buyers should wait for at least 250 before thinking of buying. I was treated as untouchable - a person who was deflating the big feel wonderful balloon. Now, at 185, we do not hear any talk of Hind Oil Expl on TV. I wonder why?

Take Care.

10 comments:

Pi said...

you wrote on the 'Track Record' site dt today on cnbc uve said dt we maybe entering a bear market? Can you elaborate more on this - why, when(time frame), hypothesis, when it gets negated etc.

Apart from that I would like you to address a more pressing concern. I have been holding short Nifty from 5200. Now what i dont know is where to book profits. Often there will be big bounces resulting in drawdowns but ultimately trend continues. other times trend itself turns turtle. like in nov/dec whr i didnt book shorts at 4550 & there was this ferocious pullback. was expecting an even deeper cut then, as you are now. Kindly suggest an exit strategy. position size - 3 lots.

Niftic said...

From the weekly chart of educomp,it seems that it has broken the 61.8% retracement level of 555 on 20may2010.So now it should come down to 270-300 level from where it began the journey upwards in Feb 2009.But as educomp is approaching the oversold level with SLOW STOC @ 2.4 level & RSI @ 28.4 level on 2 yrs weekly chart,it shud find some support @440 before it goes down to 300.
"2009 Low on Feb 06" = 268.5
"High on Oct 09" = 1020
Diff = 751.5
61.80% = 464.427
"Target Price with 61.8%" =555.57

Sudarshan Sir,
Please correct me if I am wrong.

Niftic said...

Sudarshan Sir,
I want to share one out of the box feeling with you.In Jan-2009 US govt announced billion dollar bailout package & market corrected sharply touching the yearly lows in Mar,2009--only to buy the lows with bailout money.
So are not the same phemomenon is going to repeat where-in for May-MID July'2010,market will correct significantly all over only to start another BULL RALLY.I know short blood bath is waiting to happen.But in the 3 months horizon should not the retail investors start focusing on buying after there is subsequent higher lows in two,three consecutive days & wait with a stoploss below 2% of the lows,only to catch up the big move.
Please suggest & give us some tips about when to start purchasing.

Jagdish said...

That is because there is zero accountability OR track record for the people who comment on TV. We all are aware of Mathew Easow case where he was reprimanded by SEBI for taking trades opposite to what he recommended on TV. I'm also aware of another high profile TV analyst who recommends one thing on TV and has no discipline to take his losses. There has to be some accountability for the analysts. But I must admit you do the right thing - you do go with the flow a

GUNTAS said...

dear sir
a couple of days back u made a very amusing comment on cnbc stating that i wont buy aban at any price.
whats the reason behind this comment?

Sunil Malhotra said...

Sudershanji I am big fan of yours. I am reading your blog to explore the ideas for investing, although i know it's for mainly trading. You have not given any tips to investors for a while since last October 13 on your blog -build your wealth brick by brick-. If get some free time, please give some tips on your blog for investors as we are missing your tips.

"ToT-Amit" said...

Sudarshan sir,

Educomp should retrace till 445-420 levels and then we may see a bounce towards 580.

do respond to the students.

Shazia said...

hi Sir,
I also wonder why fundamental analysts say things which sound good!!
The way I interpret their recommendation is, if they say buy for long term.. it mostly means .. no profits in near term and if one buys it then one is stuck in it for really long term!!
You have almost voiced my pinion of TV analysts..
Needless to say, you are one whom I really pay heed to!!
Thanks
Shazia

Danish Kapur said...

I can understand Udayan has good understanding of markets but Mitali...what so speacial about her...Maria is best...

Saurabh Rawal said...

Already wasted precious time earlier to track analysts(referring to your earlier post) with mixed and unimpressive results and now tracking my own analysis with whatever limited technical/fundamental knowhow i have.I am an Investor and budding Trader....an Invader(Investor n Trader) perhaps to put it in single word though i have maintained seperate accounts for both.
I don't know how many Indians have done commendable internationally reckoned research in stock markets but I hardly come across any tools or techniques devised by an Indian which is practised worldwide.Care to throw some light on this.or correct me if i'm ignorant.