14th Aug 2011: Mother of all support is now the big time resistance level.

Finally the Nifty closed below 5200 levels. After so many attempts by the Bears, finally they got success.

Once more of the Monday carnage. Investors were in mayhem whether to hold on to their positions of book losses into their long positions. Monday, stocks of Japan, Hong Kong, South Korea and Taiwan were bleeding red. Dalaal Street dropped down more those 500 points. Trading came to a halt for some time in Korea’s junior index, while Israel paid the price of a historical friendship when its sovereign bonds, guaranteed by the US, were downgraded by S&P. Next day was just the copy of the previous day.

Rupee drops to its 6 week low after RBI said that the downside risks to growth may have gone up following the US rating cut. S&P cautioned that it could lower the sovereign ratings of countries like India, Japan and Malaysia, which are still to recover from its economic meltdown of 2008. According to the S&P Fiscal capacities of Japan, India, Malaysia, Taiwan and New Zealand have shrunk relative to pre 2008 levels. S&P have already downgraded US debt rating from AAA to AA+. It takes a minimum of nine years for a country to regains its AAA rating.

S&P downgraded its rating on the US by a notch to AA+ with a negative outlook. The rating agency stated that they felt that the political system of the economy has become less stable and that budget cutting announced earlier will not be enough.

S&P in July had stated that $4 trillion in cuts over a decade will be required if US were to have its AAA rating. On August 2 the policy makers agreed to enforce $2.4 trillion in spending restriction over the next 10 years. US have $14 trillion of debt and even after the deal last week it is anticipated to add another $7 trillion over the decade. As per the S S&P analysis the US Debt to GDP ratio will rise to 74% by year end, 79% in 2019 & will hit 85% in 2021. Rating cut lead to fall in the crude prices also. Crude collapsed nearly 10% within just two trading sessions. Some analyst expects commodities to continue its down trend.

Food inflation accelerated to its highest in 3 months. Experts feel that the inflation rose to its highest levels in last 3 months due to the excess rain that cut down the transportation. But I really do not understand when without the monsoon also the inflation was at almost at is high and after the rains also it’s the same.

June’s Headlines IP growth of 8.8% was insignificantly above market expectation of 5.5%, this suggests the RBI may hike rates by another 25-50bps. Yoy IIP (Index of Industrial Production) growth accelerated to 8.8% in May 2011 from the 7.4% recorded a year earlier and an upward revised 5.9% in May 2011 (from 5.6% earlier). Looking at the sectoral components, mining IIP grew at 0.6% yoy, electricity IIP at 7.9% and manufacturing IIP at 10.0%.

Indices lost more than 2.5% in a week. Midcap and Small cap index lost 1.5-2.5%. IT index was the major looser. IT index lost 8.4%, Metals also lost 6%, and Reality Index too lost more than 4%. Auto Index was the only gainer in the lot which gained 2.7%.

M&M gained the most in the week +13%, Hero Honda 6%, Acc, Kotak, Maruti, Bajaj Auto gained in the range of 4-5%. After the fertilizer policy Chambal gained 12%. In the midcap lot Bombay Dyeing gained 6.1%, EID Parry 6.2%, Bata India 9.7%.

In the losers Sterlite Ind lost 12%, Tata Power and Reliance Power both lost more that 11%, Infosys lost 8.2 and TCS closed down 10.4%. Relcap lost 11.2% and T. Steel tanked nearly 11% while Tata motors post results lost 10%. Aban sinked 9.5%. In the mid caps, Apollo tyre lost 11.5%, Sterling Biotech closed down 12%. Alok Ind 9%, Strides 8.8%, Nav Bharat Venture 8.6%, Rolta 8.4%.

In the last week I had mentioned that Indian markets are looking heavy and we may see Nifty at 4800 levels after the close below 5200 levels for two consecutive days. Nifty closed at 5072.95, in the intra week trading session nifty made a low of 4946 and a high of 5200 levels. Nifty opened the week below its 5200 levels, which was suppose to be its strongest support. Nifty bounced back from its low and tried closing above 5200 levels but could not sustain and lost nearly 2.5% in a week. Chart 1.

I had mentioned about the break of the Inverted Head and shoulder pattern formation in the last week. This triggered the sell off in the Indian markets with the global meltdown due to US downgrade. But everything said and done the rally in the Indian markets did not suggest that the India markets were in a good position. Inflation and corruption still remains the major concern in the Indian markets. Nifty had closed down below its retracement levels.

From the chart 2. Downside the retracement level comes at 4986 which is 138.2% retracement levels from the high of 5745 and a low of 5195.90. Nifty closed above its 123.6% retracement levels.

This suggests that Indian markets are still not safe haven to invest. Investors are advised to stay away for some more time. In a hurry investors are tend to make mistake. Markets are not going to go anywhere. If the US problem deepens then when we might the same stocks at a much cheaper price.