Sunday, October 3, 2010

Weekend Analysis - 1

Let us look at the larger picture and understand the action going on now.This picture cautions us going ahead.

1.  Nifty has rallied approx. 3615 points since low of March '09 in these 18 months ,out of which approx. 38% or 1365 points is since June '10 series i.e. in last 4 months !!!.

2. The P/E ratio has crossed 25 level after Sept 20th. This figure of 25 has been crossed only twice before in Jan 2000 and Oct 2007 !!. Markets have extended to 28+ levels on both these occasions ,in fact they have traded above 25 levels for three months both times. Clearly we have entered the bubble zone now. This alerts us not for a mere correction but probable reversal of the ongoing trend,going ahead in near future.

3. Last Month's Nifty futures open interest had also reached record high volume levels ,though this can also continue further ,but such high volumes at new tops are not sustainable for long . Similar Volumes were seen In Jan'08 and April'09 periods which proved to be trend reversal times.

4. Medium term Indicators are all in overbought zone since crossing of 5500 levels.The rise has been without any significant correction.The same is with deviations of Moving averages from their means.

5. As per probable EW count we have entered the Fifth and final wave of this upmove. The extended fifth wave can generate a euphoria and  make people feel having  being left out of rally and then entering at new highs. The prices and news are all bullish with significant new targets given by analysts in media,with optimism at extreme. These are typical characterstics of the Fifth wave which traps most retailers.

6. This phase is for booking out systematically of the previous long positions. If no positions are held then should trade light. Refrain from shorting at each new high till a clear signal emerges ,this will only prove to be Bull fodder and fuel the upmove at each short covering rally. Money management and Position sizing are the important mantras to be practised now because the correction to unfold will be fast and vicious ,any wrong move will be a trap resulting in significant losses. Going forward one should trade with strict stoploss and follow discipline in any method he/she is following.

Please trade with caution ahead.


BALA said...

Very good analysis.I have one doubt. The PE ration etc are based on the past and you are saying. If FII decided that base PE ratio should be 25 to30 and bubble zone should be 35 to 40 like that , then ?? After all it is their market. When they are pumping money as if no to morrow, then how will get back their return unless they trapping the Indian people.This is all known to them .By investing @ this level how they will get back the money invested if correction takes place.The market secret lies in that.A big analysis is required from the start of FII investment India and up to now and their average cost of holding and their return expected.

BALA said...

Previously the markets are inter related .For example over night ,US raises, Asian open green then our market will be up . Now a days this is delinked and not totally. We have to see the world over and @ particular point which country stocks are valued less /PE ratio is less with some growth potential like that ,At that time they will take the money and invest that in that country. Very great part of statistical data etc is required and for that our research team /software are not up to the mark is not available. Only way is to periodical profit booking and shift the money to deposits

AAR VEE said...

hi Bala,

Thanks for sharing ur views.
I wrote this post to caution friends ,
any analysis can be based on past data only .New statistics will be created in time but will always have corelation with past .what we should do is to prepare ourselves for future ,just go with the trend but have strict discipline .

As per liquidity u must know by now that these hedge funds can move out quickly as they are pouring in now.they have done in past and they will do that in future too and Markets do not garauntee that each FII will make profits only. 2008 is example where new hedge funds lost out significantly in India and many hedge funds wiped out with all their liquidity across the world.mere carrying a tag of fii is not enough to reap profits.:)).

whatever the case be its caution going ahead ,i mentioned that its the start of the bubble zone and may carry on ,November are USA 's senate elections ,may be till then.feel good reqd. there also ,a guess:))

VK said...

Good post. What should be the length of 5th wave with the base value of 5964. Assuming Nifty remains above 25PE for three months from hereon, it means till Dec 2010 no hassles and January 2011 could be the return of the bears and the threat of LC looms large? Please throw some light on your views.

AAR VEE said...

Hi VK,

I will be posting the targets for wave 5 in next post.

Dont take the three months for granted but prepare urself for any swift reversal by keeping discipline in any method u are following and booking out at levels by it be it 2 day low ,pivot low ,trendline break ,indicator crossover ,fibo extensions etc or any combination of them.
manage ur positions ,dont overtrade ,dont be leveraged and cut positions fast.
Buying on dips may become a trap from near future also.

mynac said...


Thanks a lot for analysis.I will remember your particularly last 6)No. para.I would like to share my observation here with the help of old NF data in connection with the 25+ P/E ratio then.
1)On 12/12/2007 NF top 6201.65 then a correction up to 5720 on 18/12/2007.just 5 trading days.
Then from 5720 again up move &
2)On 09/01/2008 NF all time top 6336 (just 14 trading days from 5720) then correction up 5861.60 on 16/01/2008 (5 trading days)& from 5861.60 to 4420 on 22/01/2008 (in just 4 trading days)
As you mentioned above This old data also tell us that when there was a correction then how it was fast & furious.So though market now a days is in up trend One must be careful because market literally gives absolutely no chance to trade when it starts to correct.

AAR VEE said...

dear mynac

Thanks for the observations ,good as always.

If this bubble zone goes on from now on and the open interest figures swell ,i may take my neck out and say that we will see a down circuit in future to give way for swift correction.

will depend on the o.i. what type of correction will unfold ,swift or slow distribution trapping at each level.

till signs of reversal are apparent ,no dooms day predictions :))

Sriganeshh said...


Today's BusinessLine contains beautiful write up on PE Ratio..will help all to understand the fundamentals.
PE is still within buy zone for the FII as rupee is appreciating keeping with GDP growth which will absorb the increase in inflation rates and proposed increase in interest rates

I dont like to fix target when the underlying momentum is strong anyway, guess around 635o plus onwards say approx 6402 onwards, it is entering caution zone...

take care and have lots of profit


Sriganeshh said...


i do agree that old data helps us but related economic factors has also to be considered along with is like removing bugs in data callled as data sterilisation in statistician's view

Sriganeshh said...

The link for article on PE is

hope it clears some of the doubts


AAR VEE said...

Hi Sri,

U know that i am not much of a fundamental analyst type.but the chart shows that P/B is lesser than previous comparable P/E above 25. yes in an upmove targets cannot be fixed more so when resistances are not there to withheld.This post was just to put in word of caution to be aware that we are moving in danger zone.
In markets extremes justify rationality and thats where people are sucked in. reversal will come only then.