Commodities on the “Edge of Gory” – Article by Michael Kahn (Source Marketwatch)

Hi All,

I am pasting an article I just read and will be of interest to many of you. Even if you do not follow commodities probably you can relate this to metal stocks prices. Not sure how the next few days/weeks turn out but if the technical trend does break for commodities then it will be good for inflation and companies raw material prices but at the same time bad for companies trading in commodities in terms of revenue and accordingly profits. Anyways commodities is a cyclical market and everyone should be ready for cycles in the stock pattern. Commodities related stocks have already corrected and as I say stocks generally outguess the real scenario atleast 2qtrs ahead so I will not be surprised if some of the breakdown in commodities is already priced in stocks. As you can see in article below, oil also managed to reverse breaking the trend so will not be surprised if others also do so after breaking down and trend line is not a forward looking indicator but can only show what has already happened.

This article is taken from Marketwatch and writer is Michael Kahn.

NEW YORK (MarketWatch) — With a few exceptions, many key commodities are at do or die moments.

Stingy bond yields and volatile stock prices are sending people scrambling for alternative places to put their money. While news reports tell us that selected food prices are rising, investors looking at the commodities markets as places to ride this trend may be in for a surprise.

Many commodities are now at long-term crossroads where any further selling pressures can push them over the edge. One look at the Reuters/Jefferies CRB index XX:CRY -0.59%   bears this out (see Chart 1).

This index, the reformulated version of the venerable Commodities Research Bureau index, is now sitting on a three-year trendline with bearish implications. In technical analysis, when a strong market trades down to touch a support feature such as a rising trendline it usually bounces quickly and gets back on its rally horse. That is not the case here.

In September, when commodities prices dropped sharply with the stock market they seemed to bounce back just as quickly. However, within a few weeks they were back down to once again land on the long-term trendline.

Weak markets do indeed stay on support features to allow weak hands to buy comfortably. The market does not often accommodate latecomers and the longer the index stays on the trendline the more likely it is to break down.

Why? Because the bulls could not take control. Because demand was just barely enough to stop the price decline but not strong enough to take them higher.

TRADING STRATEGIES: DECEMBER

Gold Will Glitter In December
Gold prices have softened of late, but reasons for buying gold haven’t changed, says Adrian Day, president of investment firm Adrian Day Asset Management.

Fortunately, there is a little wiggle room on the charts. Should the trendline, currently at 303, break there is an important support level just below at 294. This is derived from the major January 2010 peak, the minor November 2010 correction low and the major low set this past October.

It is the last defense for the bulls and if it fails to attract buyers then there is little in the way of chart support until the mid-250s. That would be a 13% drop on top of what has already been lost this year to date.

The two commodities most individual investors follow – West Texas Intermediate crude oil and gold – are the exceptions.

Gold, for example, is often considered to be another form of money and not a commodity at all. A long-term chart shows the yellow metal to still be holding firm in a well defined bull market (see Chart 2).

The September plunge was merely a correction and because prices were rising at what is normally an unsustainable pace it was much needed. Don’t let the size of the drop fool you. It was a necessary cleansing of a frenzied market and that frenzy is now gone.

Technically, the September low at $1535 per ounce was a nearly perfect touch of the long-term trendline. And following on the earlier analysis for the commodities index, gold bounced quickly from the trendline making it uncomfortable for weak hands. They had to move quickly or miss the train pulling out from the station.

I still view gold in this light. While the trend is choppier now than it has been for the past few years, it is still rising.

And finally, crude oil presents a muddier picture (see Chart 3). It broke down below its rising long-term trendline in August but it has already reversed course to head back up. Right now, it is at a crossroads. If the bulls can push the market back above the old trendline into triple digits and hold it there then the long-term bull market would be back in force. If prices fail there and head lower then we will have confirmation that the rally was a temporary upside correction in a new declining long-term trend.

The bottom line is that across the commodities markets, most are in do-or-die positions. Gold may be the exception but it, too, cannot afford to flounder at this point or risk the resurgence of the bears.

And for investors, if you are looking something that will let you sleep at night, commodities is not the place.

Finally an upday in the Market! But can it Last?

Hi All,

So finally we had a good day in market where stocks showed some momentum but mostly lot can be attributed also to expiry. We did manage to end the expiry over 4700 after making new lows earlier in the morning. As per my last Nifty update, I mentioned about downward channel and the market is still in that channel. Now the downward support in the channel is around 4560-4580 levels (ofcourse this will be lower with time as its downward channel). Market went around 4630-4640 and then made a sharp bounce later in the day to close over 4750 levels. I did mention that if market falls below 4700 in one direction then it is time to buy as there has to be a bounce expected which was long overdue. Todays rise can bring in some short term respite but there is no way we can say that bottom is in place. I have not been giving any share tips for some days as I prefer now to give market direction and how I see market behaving rather than a specific stock as overall market direction is probably everyone is interested in and if any specific stock query is there can always be posted in Q&A section.

Ideally market should now face resistance around 4830-4870 levels , the same way it had support at levels around 4850. So this upmove can take market to those levels if there is no bad news for few days and rupee can appreciate a bit. If market shows sign of tiredness around 4850 levels then I would again be apprehensive and think market can come down to 4560-4580 levels if it makes new low and that time I will again buy with strict stoploss of 20-30 pts as breaking a channel will anyways bring market down quickly. On upside if it can go over 4850 levels and show some momentum then it can go back over 5000 levels (see my last nifty update on downward channel) and then correct. I hope we stay in channel only and do not break below it and if there has to be a break out it be on the upside.

Nilesh

Is there a panic on Dalal Street?

Hi All,

Past 8 days have been nothing short of exciting times for bears while unforgettable time for bulls. While markets have been making newer lows every day, individual stocks are extrapolating the fall even higher. Once market gets into grip of bears, or sentiment weakens a lot, there is no limit to how much a stock can fall or markets. The sames seems to be unfolding out in Indian markets. Probably it must be confusing for lot of people on whether the real economic problem and epicenter of financial crisis was Europe or us :). But lets try to decipher what market is trying to tell us because as we all know markets are quite forward looking and wants to factor in future atleast 6 months down the line. So the way markets are behaving , it is definitely a cause of concern for India investors and a greater concern for foreign investors as they are losing even more due to rupee fall. While we were trying to live in a cinderalla world earlier trying to potray as if India economic engine can run on its own without having an impact from what goes on in the world or the talks of India being a growth story, 2nd largest emerging economy etc… now is the time for reality check. No way India is isolated and no way can India continue to be favorite destination for FIIs if we keep living in a dream and do not do much on the ground. India is a population of 1.2bn with such a huge gap between herself and a developed economy and so the potential is immense if we have to reach the levels of US, Japan, Germany or other developed economies… but then if we are able to just grow at 7% and think we are doing great , then sorry we are grossly mistaken. A country have to use the opportunities available and not just think everything can fall in place on its own.

So now the bigger question is there a panic seen in Dalal street or we are just behaving normally? I think we are still not in panic phase. Yes there is huge correction in individual stocks but atleast at index level, we are just adjusting and not panicking. Yes, 8 days of fall looks too much but the way it has fallen and the reasons, I do not think it is panic. Now can we outsmart market and put a level where we should Buy? I guess it will be wrong strategy to do so. We should either wait for markets to stabilize and give good indications that it has stopped falling before we venture into it or we start nibbling in small quantities based on our strategy on how much one has to invest and the timeline. The way market and stocks behave nowadays, long term targets can come in weeks/days, short term in a day or hours…. And people might think when market gives a bounce that they have again missed the rally. From my perspective, as I have told earlier, looking at individual stocks is important but ofcourse in overall view of market direction. It would not be wrong to expect markets to bounce back in very short term from oversold levels and trap the shorts or give a feeling to bulls that they are back.

From a market strategy perspective, I would probably take the risk of buying the index or some of the stocks if market tomorrow opens lower near 4720-4740 levels and look for intraday recovery and try to make 50-70pts on index or 3-4% on stocks. Now with the way rupee is behaving, it if is to make newer lows tomorrow, there could be another set of selling but then I think there is bound to be some sanity in forex market and expect rupee also to stabilise and appreciate. Last time rupee was at these levels was in 2009 when market was at its lowest levels and stabilising on lower side. From that level rupee appreciated and market made highs. Now if there is similarity in that movement and this, market should be probably making a bottom now but then rupee has not yet stabilised. I guess only few months can give concrete direction on whether rupee has made a top or not and can market go up again. We are having lot of negatives factored in right now – interest rate, inflation, rupee depreciation, global shocks, sovereign debt issues etc.. so once things look better, there can be a sharp upmove and not to sitting on side that time, it is key that you look to equity markets for investment but not in one go but as a SIP in individual stocks and with clear horizon on how you see short term and long term. Be clear on how much you can put in market (consider this as risky money which you do not need until your investment horizon) and then think on how you need to spread that as investment in market. I am pretty sure you will be a happy man in future if you do it right way.

So Happy Investing and Trading.

Nilesh

Poll – Where will Nifty expire in this Nov series?

Update:

The poll is now closed and results are as follows:

 

Answer	Votes	Percent
4700-4800	7	33%
4900-5000	6	29%
4800-4900	4	19%
5000-5100	4	19%
Below 4700	0	0%

Hi All,

Share your responses to newly created poll and also share the link with your friends to respond.

Nilesh

Nifty Overview

It will be fair that I start my recommendation with giving an overview on Nifty and how I see it during next few weeks. As I have mentioned in my previous post, there is too much volatility with so much news around us. Unfortunately in such markets and with the way internet and media works, every bit of news or rumour is discussed to such a length that at times it becomes difficult to analyze the impact. Fundamentally the markets are trading around 12-13 times PE and many might find it attractive but as we know when the sentiment is bearish and environment not fruitful for equity these fundamental factors take a back seat. Moreover, I think Nifty might not give a very good fundamental picture on overall market dynamics as quite a lot of stocks are making multi year lows and some of them could be very good fundamentally or will show good fundamentals down the line and should naturally show higher value of their stock price. Nifty being an index has to be managed for various reasons such as call/put options, positions of FIIs etc and cannot be just dramatically pushed up or down like any stock can be done. Anyways fundamentally, any further fall of 10% on index can be very exciting times for people following fundamentals. Ofcourse at stock level you can start buying in small chunks but have to be sure what is your strategy and outlook.

Lets now look at Nifty technically. Attached is Nifty chart for past 2 years.

As you can see Nifty has been a downward trend channel since past 1 year. The range of the channel has been broadly around 600 points on Nifty. Over last 1year Nifty has touched the top end of the channel around 5 times (I am not referring to a touch on a daily basis but on a broad level) after falling to either intermediate line in the channel or bottom trendline of the channel. On downside, Nifty has bounced back multiple times from the intermediate channel line while 3 times from lower channel trendline. Only once Nifty decisively breaks out of this channel we can assume a change of trend but until then we are in this channel and the direction is downward. The reason it is downward is because there are consistent lower highs and lower lows. Now lets take what scenarios exist or outlook is for Nifty going forward after closing around 4940 levels today.

Scenario 1: Nifty bounces back from intermediate channel trendline i.e around 4850-4880 and go back to 5100 odd levels and then again come down to go till 4300-4400 levels over a period of few months.

Scenario 2: Nifty bounces back from intermediate channel and stay between the channel forming top and intermediate channel line before breakouts on the higher side. But do note this is downward channel and the lines keep going down so if the level is 4850-4880 around next week then this will be further down after next week. So we cannot just assume these levels sacrosanct and have to revisit every week or 15 days to be sure what pattern is Nifty forming.

Scenario 3: Nifty breaks bottom trendline of the channel over next few months, which will be very bearish and chances should be very low for that at this moment.

Scenario 4: Nifty breaks top trendline of the channel i.e around 5300-5400 levels and become bullish. Again chances for that happening should be less in current scenario. So ideally we should be in a channel before things stabilize in global scenario. The probability of scenario 4 over scenario 3 will be more in terms of outlook for next 12-18 months.

I think there could be further possibilities and trends emerging but I stick to these 4 scenarios for now.

Again as I said index is whole different game than what happens to individual stocks and index level can give some guideline on market trend, it is important to analyse individual stock in its own way.

For expiry, I do not see market going below 4850 levels but if it goes then fall to 4500-4600 will be very quick.

Nilesh

I am back to Blogging!!!

Hi All,

It has been almost over an year since I stopped blogging on my webpage but I plan to start afresh again and ensure I can stick to some regular posts and also respond to queries. I can say one thing for sure that I have every day thought about this blog but due to some other commitments such as my work, my personal life where I had to enjoy the time with my daughter (10 months old now), I could not dedicate time to blogging. But now I hope, i can give atleast an hour daily to do a regular post during week and also provide answers to people queries. Also I am thinking of allowing others to respond to queries giving more perspectives but of course all responses will be moderated to avoid spam.

Lot has changed since I stopped blogging. On a global level, there has been another crisis unfolding and this time the epicenter is the beautiful Europe with some economists talking of breakup of Eurozone due to unsustained level of debt some of the Euro zone countries are holding. On domestic front, inflation and interest rates have been the talk of the town and impact has really started to show in bank NPAs, lower IIP numbers, GDP growth forecasts being slashed and very clear case of slowdown seen everywhere. Apart from this there is still jury out on whether the world global economy is going to recover fast and show good growth or go into another recession.  And if economic crisis was not good enough, we had so much political drama ongoing in middle east. These are unimaginable times when the global stock markets are witnessing volatility which I have never seen in my trading times. Gone are the days when stock moving 5% a day was considered huge move and for some countries like US and European countries, the returns of 5% would have outperformed lot of returns. But now are the days when stock market indices move 3-5% on a daily basis. If one day has seen an upmove of 5% then another day, another news and the market is down the same.

Indian market has been no exception and with its own problems, recently talks about fiscal deficit, slowdown in growth, rupee depreciation etc is not unattached from global problems. Last month, market showed movement past 5200 which made many analysts think that we are in an upmove for short term but then we are again staring at below 5000 levels. One will be a fool to say I can judge markets, what everyone is doing is basically giving their own theories by analysing various data. But one thing which I hate in all these talks is that India has to grow irrespective of govt not doing anything and that India is emerging economy and world has no options. I am surprised why we take India growth for granted. We do have a growing middle class with rising pockets to spend but then the divide between rich and poor is also alarming. We might be doing good due to consumerism phenomena but if Government does not do much and Global economy does not improve, we are not going to outperform anyone. Our market index level might not show the right picture as we are still at 5000 while stocks have been making newer lows and lot of stocks below 2008 crisis low levels. If one is smart in investing and looking for short term and long term investment there is definitely money to make but you should have good amount of money to play with, to allow averaging and diversity.

On my own market theory, I was thinking market to go to 4300 levels but it did not break 4700 and went to 5300-5400 levels but now it is coming down so I will not be surprised if market goes to 4300 levels in few months but then looking at how market make moves, judging months is difficult so rather than saying timeline, i think we should have gone logically to 4300 levels but as we have not then lets see if 4700 levels can hold. On higher side, we have not made any breakouts to consider that a sustained upmove is on the way. Markets will make moves 6 months earlier atleast than when real market/economy start moving or things improve as markets is always smart to know.

I will end my first article after an year gap here and will come back soon with some recommendations. I am keenly watching some large caps and banking sector.

Have  a great day!

Nilesh

What to do in these market conditions?

Hi All,

While I have ben busy with my family, I have noticed markets have fallen a lot from higher levels to current 7 month lows. Everyone is talking of how India is going to underperform within the global equity markets setup. Within emerging markets also India is only next to Egypt in underperformance (Egypt has fallen due to political reasons well known). So what is driving Indian markets down? Well one thing I have noticed across markets and over these years, is that when going gets tough then tough gets every indicator you follow. It is very unique that how once market starts falling every indicator of economy or various factors for a country seem all doing very bad. And when things go well, everyone is gung-ho and likes every bit of news and indicators of economy. The basic question arises the analysts and economists who were predicting all good things about India few months back have taken such a big U turn and thinks everything is so bad. When they could not predict this even 3 months back how can you trust them to predict next 3 months right. There is no doubt that Indian valuations were high compared to developed markets and with economic scenario improving in developed countries, there was bound to be shift in favor of those markets but in no way one predicted Indian markets falling almost 18% within 30 days of trading in a new year. I understand there is whole set of issues being discussed and topping the agenda is Inflation, Current Account Deficit and FII outflows.  Apart from these other issues are Governance, corruption, political gimmicks happening in Delhi and how Budget would be presented within this environment and what sort of reforms happening etc… Well I guess even 3 months back all these scenarios were in picture but media has started covering them with more zeal and enthusiasm than before and so called business news channels are propagandizing the negativity also with vigour to capture attention of all. Markets are weak and every bounce is being sold of and its not a market where everyone can make money but if you are prudent in your strategies you can come out on top. All midcaps have taken a beating and affected your portfolio a lot and most of you might not be having cash to buy anything in this falling market. So this is not the ideal situation but those of you who have been waiting for a fall in market and have cash, should seriously look at quality large caps and mid caps from investment perspective or even trading and start nibbling into them. Those are fully invested should evaluate the current existing holdings against the opportunities available and see if you can value buy other stocks by selling existing holdings. It is the human tendency where you cannot sell a falling stock and thats where retail investors lose out.. and we sell when it is at bottom and being accumulated by big players. I would strongly urge to take negativity in your stride and expect that market has strong support within 5170-5250 levels and if it breaks that then it would go to even 4700-4800 levels so what we are saying is another 10% fall in worst case unless things go horribly wrong in the world and India. You should start buying into market and put almost 30% cash you have at these levels and upto 5170-5250.. If it breaks there and goes below then buy another 10% at every 100pt nifty fall and reach 70-80% of your cash till it reaches 4700-4800 levels but if it does not fall and stabilize and start rising then see once market stabilises then start buying individual stocks further. You have to be patient in this market and quick at times when volatility increases. Some of the stocks I would seriously recommend at current and within 10% downside of current levels (there are many many stocks but I have not got time to look at them so telling what I know of my head) – Bank of Baroda, Oriental Bank of Commerce, L&T, Bharti Airtel, Canara Bank, Uflex, Hindustan Petroleum.. I know lot of them are banks but this is one sector which I would always like as they are not overvalued and seems decent banks… Also you can look at stocks which are trading at lower then their long term average PEs, providing decent ROE QoQ, net profit growth, good cash flows, low interest burden and debt… and have visible outlook for next 6-8 qtrs….

So in short, this is good investment opportunity but do not buy into a stock just because it has fallen 50% from peak, while such a stock can provide trading bounce, it does not mean it is also a good investment opportunity. So do your own due diligence and get into market in stepwise fashion.

Hope to get time soon where I can be more regular in posting.

Regards
Nilesh