july 2015 issue th the current research report provides ... · 8/5/2015 · the financial waves...

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The current research report provides detailed explanation on the following - Nifty outlook: As expected Indian Equity Market has continued to trade in range bound movement. The current research focuses on Nifty forecasting applying Neo wave theory along with technical indicators like price oscillator made up of 5 weeks and 20 weeks Exponential moving Average, Volume to find out strength or weakness and Time cycles. Path ahead of CNX Midcap: Midcap and smallcap indices have continued its outperformance over past few weeks. In 2015, these high beta indices have managed to generate better returns than that of Sensex or Nifty that gave mere 2.5%. It therefore becomes important to understand and measure the overall strength of these indices that measures the sentiment in broader market. Ashok Leyland Long term pick: We have picked up from Ashok Leyland from Auto Index which long term structure looks good and has capacity to provide greater returns. Elliott wave theory suggests that prices have immense potential on upside in coming years. Outlook on Dow Jones Industrial Average: US Equity market looks to be in limbo for many weeks now. Prices have failed to move anywhere but sideways for quite some time and a trending move is due to emerge! Elliott wave theory along with momentum indicator suggests that up move is in matured stage from medium term perspective. What is happening with Gold in terms of INR?: Finally “Gold has lost its glitter” is becoming the theme! We warned about impending Gold bear market more than two years back. Is 22000 or lower possible or up move from current level? Outlook on Gold applying channeling technique, Elliott wave theory and Time Cycles. USDINR: Indian currency has been one of the major outperformers amongst emerging market currencies. It seems that Mr. Rajan has succeeded in curbing down the volatility drastically and we can see that in the price movement over past entire year. What is next now? Applying Andrew’s Pitchfork, Elliott wave theory and basic technical indicators. Where to Invest NOW?: Investments should not be done only in a single asset class. It is prudent that along with direct exposure to stocks one should invest by way of Mutual Funds probably a thematic one to capitalize on a theme that can drive the growth over next few years. This will help in diversification and risk reduction.

July 2015 issue 5

th August, 2015

The Financial Waves Monthly Update – August 05, 2015

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Figure 1: Nifty weekly chart

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Figure 2: Nifty daily chart – Anticipated on 3rd July 2015

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Figure 4: Nifty daily chart

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NSENIFTY (8,564.10, 8,565.15, 8,448.25, 8,516.90, -26.1494)

In previous monthly update published on 3rd July 2015 we mentioned the following: “In a nutshell, there is possibility that prices can move towards 8670 and will then again turn back on downside. This will result into no net progress and more of sideways action over next few weeks. The key levels to watch for medium term will be 8670 on upside which is close to the important blue trendline resistance” Happened: Nifty moved exactly as per the path shown in previous update. Prices moved higher and touched 8654 levels from where there was a sharp down leg as per the path shown. However, it managed to protect the previous pivot low at 8315 and bounced back again over past few days. This makes the short term trading environment challenging but given the fact that we are now in wave [E] of the triangle pattern on primary degree such sideways action but sharp reversals should form an important part of risk management strategy. Triangles are most difficult pattern to trade given the fact that it consists of 5 legs and each of these legs are corrective in nature. The final leg of triangle i.e. wave [E] can itself form any type of correction and can also form a triangle itself. Due to such number of possible scenarios the accuracy reduces and forecasting becomes difficult. It is during such scenarios that Time cycles are very useful as it helps us to understand the key reversal time zones. As explained in earlier updates the next important low should be formed by November 2015 and we can continue to see such lackluster movement with no clear trending direction. The path ahead is shown in Figure 3 of Nifty chart which also reflects that the movement of July had been exactly as anticipated in June update (highlighted by circle).


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Price Oscillator: This indicator shown on Figure 1 at the bottom reflects a different way to measure the overall momentum. This indicator is plotted using 5 weeks and 20 weeks Exponential Moving average. Prices do not move randomly and in statistical terms shorter Moving average will deviate away from the longer average and then will again try to mean revert. This will produce rhythmic cyclical movement. Price Oscillator plots the difference of these two averages and when the shorter moving average crosses below the longer one this indicator moves below 0 as the difference gets negative. Also when the shorter moving average fails to move well above and away from the longer MA it indicates some loss in upside momentum. Figure 1 shows that when prices continued to move towards the high of 9119 in March this indicator started moving lower. This is known as negative divergence. Also few weeks back this indicator moved below 0 level and is now oscillating around that zone which shows that the momentum on downside is increasing as shorter moving average is more frequently crossing the longer average on downside. In a nutshell, as long as we do not see the level of 5 which is previous high in this average wave [E] of the triangle pattern can continue and the pressure will remain on downside over medium term perspective. Volumes failed to increase: Volumes have continued to be subdued after May 2014 and has failed to reach the highs of election period. Any sustainable up move requires more and more participation and so in technical terms an upward moving market should be accompanied with higher volumes. On the other hand subdued volumes with no net progress clearly synergies our expectations of sideways correction which we are witnessing currently… Diametric Pattern: The current ongoing correction in wave [E] is probably a 7 legged corrective Diametric pattern. A Bow-Tie Diametric pattern has contracting a-b-c connected by corrective wave d and then expanding e-f-g legs. Each of these legs is corrective and looks like a contracting triangle connected by expanding triangle. As shown in Figure 3 we can clearly see contracting behavior in a-b-c leg and currently wave d is in progress. Post completion of this wave d we should then start seeing the expansion in form of wave e on downside followed by wave f and wave g. Time Cycles: It is during such complex scenarios that Time cycles help us to understand the probable turning areas. The next low as per 54 days Time cycle is going to be formed only in last week of August or 1st week of September. This cycle has now entered into the topping zone and so we expect wave d to get complete over next few days and then the downtrend will start which should retest the previous low near 7940 levels. The path is as shown. Extracting Triangle: On one lower degree within wave d we are currently seeing Extracting triangle formation and prices are in wave (e) of this triangle shown in figure 4. In Extracting triangle each of the up legs get smaller and the downside pressure starts increasing. The sharp fall from 8654 to 8320 was the biggest down move post the low of 7940 and now wave e should be smaller than wave c of the pattern i.e. it should not cross above 8680 levels on upside for this to be a valid pattern. It will be on a faster move below 8320 we will get confirmation that the intermediate wave e of Diamtric has started and the medium term downtrend has resumed. In a nutshell, we continue to look at the current movement as distribution pattern and once it is complete the downside pressure should start building up atleast till end of current month. It will be only on move above 8845 we will look for alternate medium term possibilities but unless that


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happen the downside pressure can remain on index over next few months and we can see movement as per the path shown in Figure 3. Looking at the momentum of broader market – NSE Midcap index is crucial! Figure 5: CNX Midcap index weekly chart

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Figure 6: CNX Midcap index daily chart

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Midcap and smallcap indices have continued its outperformance over past few weeks. In 2015, these high beta indices have managed to generate better returns than that of Sensex or Nifty that gave mere 2.5%. It therefore becomes important to understand and measure the overall strength of these indices that measures the sentiment in broader market. Momentum indicators like RSI and MACD helps us to provide objective way of measuring the inherent strength. As shown on weekly chart, we continue to believe that the entire structure since 2008 is forming Running Triangle. As per this pattern, primary wave [C] completed near the lows of 7350 and the rise which we had witnessed since then is in the form of wave [D]. Since past few weeks this index has somehow managed to continue it’s up move but now it seems to be in a matured stage. RSI oscillator is showing negative divergence which indicates that prices are moving higher but with reduced momentum providing warning signal to the long traders. On downside 12350 will act as crucial support. Any break below the same will infer that wave [D] has completed its course of action and next leg has started on downside in the form of wave [E]. The counts shown in the above charts are as per Neo wave logic and so the counts might differ when applied only with respect to basic Elliott wave.


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As shown in daily chart, prices rallied on upside post making the low near 12350 levels. The rise witnessed over past few months was euphoric to change majority of the bias into positive but the momentum has failed to increase. Since the start of 2015 prices are moving higher in the form of wave [D]. Internal structure of the same suggest that double correction pattern is in formation where wave x completed near the lows of 10600 and the entire movement since then is forming Diametric pattern. Diametric Pattern: is a Neo Wave 7 legged pattern namely a-b-c-d-e-f-g, where each leg consumes almost similar time frame. In this pattern expansion is seen in first three legs followed by contraction in other three legs and vice versa. The feature of expansion and contraction makes the whole pattern look like a Diamond shape. Here we can observe that expansion was seen in the first four legs i.e a-b-c-d and post that prices are contracting in the form of wave e-f and g. As per this counts leg f has been completed near the lows of 12350 and current up move which we are witnessing is in the form of wave g which is the final leg of this pattern. Now sharp down move along with lower highs lower lows will indicate completion of this pattern and then weakness can be seen in this index. Bollinger Bands: We have applied Bollinger band which is useful when prices are showing range bound action and when there is no clear trend on either side. As per this technique, upper Bollinger Band acts as a resistance whereas lower Bollinger Band provides support to the price. As we can see that prices are now trading close to the upper Bollinger Band and so fresh investments at current levels look riskier unless we see a decisive break above over next few weeks. For now prices are at very crucial juncture. Money flow index: It is a momentum indicator like RSI which uses stock price and volume to predict the reliability of the ongoing trend. It can be observed that currently prices are moving higher but money flow index is showing negative divergence which indicates that volumes and momentum is reducing on upside and a down move can anytime take its existence. However one cannot rely only on indicator as price is a supreme factor and one should use such techniques in order to make our prediction more valid and here this is coming in sync with our other techniques. In a nutshell, cluster of evidences state that the rally now looks overstretched as prices are trading near the channel resistance, RSI and momentum is not picking up. However price confirmation is yet to come which we will get once the level of 12325 is breached on downside in faster time than this wave g so far took to form. Stock pick of this month: Ashok Leyland


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Figure 7: Ashok Leyland weekly chart

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ASHOK LEYLAND LTD (85.6000, 88.4000, 84.2000, 88.0000, +3.55000)

Figure 8: Ashok Leyland daily chart

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Ashok Leyland is the second largest commercial vehicle company in India in medium and heavy commercial and defense vehicle segment with sales of about 60,000 vehicles and 7,000 engines annually and the 4th largest manufacturer of buses in the world. With a joint venture with Nissan Motors of Japan the company has made its presence in the Light Commercial Vehicle segment. As shown in weekly chart for Ashok Leyland, since 1999 channeling technique has been working well on this stock. Prices are now near the upper end of the channel and so for fresh investments should be done on pullback. However, from long term perspective this stock can give multiple returns given the fact that it has shown strong impulsive up move from the lows of 2014. As per wave perspective the sharp rise from the channel support suggests that complex correction which was ongoing in primary wave (2) has completed near the channel support in 2014 and currently primary wave (3) has started its course of action on upside which is most attractive leg as it provides fruitful returns in comparative lesser time. Currently this stock has arrived into the resistance zone so now it will be crucial to watch that prices will continue the up move with same strength or recast the same role as seen in the past and reverse from here. The 30 weeks EMA has been intact in the entire rise and the previous structure shows its importance. So as long as this Moving average is protected the trend will remain positive. In order to get the clear indication of the bigger picture the smaller structure will be ideal to watch. On the daily chart, we have elaborated the entire rise from the lows of 15 levels which suggests that currently the first leg of primary wave (3) is ongoing upside and it is subdivided into 5 waves. The internal structure of intermediate wave (i) exhibits that minor wave iv completed near the channel support at 64 levels and now minor wave (v) is ongoing which can touch the highs of 90 levels where minor wave (v) = minor wave (i). However, any move back towards 64 levels which is previous wave iv support zone will provide buying opportunity in this stock. Due to lack of data it will be difficult to do the long term projections with upside targets. Investment Rationale: From investment perspective Ashok Leyland has provided consistent results in past one year it rose from 35 to near 88 levels (150% gains). From medium term perspective the trend for this stock is positive. Various studies like channeling technique, RSI, Elliot wave perspective suggests that currently the first leg of primary wave (3) is into its last stages and correction towards 64 levels is plausible which will also provide good entering opportunities to ride the next leg of ongoing 3rd wave! US Equity market looks to be in limbo for many weeks now. Prices have failed to move anywhere but sideways for quite some time and a trending move is due to emerge!


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Figure 9:DJIA Weekly chart

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Figure 10:DJIA Daily Chart

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The uptrend started since 2009 in Dow Jones Industrial Average from 6470 level is still ongoing and this index made life time high at 18351 level in the month of May 2015. From the low of 6470 this index has rose more than 2.5 times. So now question arises whether this up move will continue or is it in danger? From Global economic perspective, post the Greece new debt deal in the recent months, now concern has shifted to China. Chinese Market – Shanghai Composite index has shown huge volatility where prices cracked down 30% from the highs of 5166 and made a low at 3370 levels in the month of July 2015. Post that there has been consolidation at lower levels. It seems the ongoing Global commodity crisis is finally here which we were expecting and the recent sharp correction seen in Chinese market one of the biggest consumer of resources clearly reflected the fragile state of world economies. Global Metal prices are also the other example where prices have continued to move in bear market which suggests that demand is still not picking up. In these entire scenarios, now question arises how long Global Equity Markets can sustain at higher level including US Market if the real economy is not growing!! Let’s look at technical perspective of Dow Jones Industrial Average: As shown in weekly chart, from Elliott wave perspective, primary wave III completed at the start of 2000 and post that primary wave IV is ongoing which looks to be forming Double correction pattern (A)-(B)-(C)-(X)-(A)-(B)-(C). In this pattern intermediate wave (C) of first standard correction completed at 6470 level and post that intermediate wave (X) is ongoing. The reason for marking this as entire wave (X) is due to the overlapping and slow nature of rally. There has been series of negative divergences on RSI which suggests that upside momentum is drying from medium term perspective. Also we can see that post October 2013 prices have been finding deeper retracement in between the up move which suggests that Ending Diagonal pattern is in formation. 5% Shifted 30 weeks Exponential Moving Average: This shifted Moving average is suiting well to the entire up move started since 2009. The support of the same EMA is now placed at 17000 levels. So over short to medium term as long as 17000 followed by 15850 is intact where pivot low is placed, trend will remain cautiously positive. However any break of 17000 followed by 15850 with lower highs lower lows formation will indicate that multi-month top is in place. As shown in daily chart, MACD has been showing triple negative divergence since mid 2013 and has been showing sell signal however as of now negative confirmation from price is pending. The RSI on weekly chart as well as MACD on daily chart only suggests us to stay cautious. There has been formation of Expanding Ending Diagonal Pattern which occurs during the maturity of ongoing trend and post this sharp trend in opposite direction can be expected. All of this these will become valid only and only if prices break 15850 level in faster time. In short, we continue to think that US Equity bellwether Dow Jones Industrial Average has been moving in matured stage of up move. Break below 15850 with lower highs lower lows formation will start medium term trend on downside. However continuation of rally beyond 18500 will force us to adopt alternative scenario. Finally “Gold has lost its glitter” is becoming the theme! We warned about impending Gold bear market more than two years back


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Figure 11:MCX Gold Continuous Weekly chart

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Elliott wave analysis: Post showing panic selling from 25800 to 24450 level, there has been some relief sign for Gold and consolidation is ongoing at current levels. When Gold broke below 25000 level many of the experts were citing about 22000 or lower levels however we do not think the same as prices have been trading at the support of channel. It is better not to follow the news and one should use objective tools to understand the market behavior. As of now Gold fall has been arrested near 24450 levels but till now there is no break of pivot resistance and hence price action of next few weeks will be crucial to observe. Let’s look at Elliott wave structure of Gold to understand whether more pain is left or prices are near bottoming phase? As shown in weekly chart, as per Elliott wave perspective, primary wave III completed at 33000 in the mid of 2012 and post that primary wave IV is ongoing which is forming Complex correction pattern. Within this pattern, intermediate wave Y is running its course since mid 2013. Prices have continued the down move in form of overlapping nature and as of now arrived near the red channel support. That is why we have been witnessing consolidation post the selloff. One cannot ignore the channel and only a break of this channel will indicate much lower levels over short term. However, in technical analysis we assume what has worked in past will continue to provide support and so it is better to stay objective rather than getting carried away in the sub 22000 school of thought! We think Gold should start showing consolidation atleast for few weeks and some attempt to retrace back the recent down fall with an up move towards 25500 – 25800 cannot be ruled out. Time Cycle of 105 weeks: This cycle has worked brilliantly as bottoming cycle. The same cycle is due now and we are going to witness lot of volatility in coming weeks. However only move above 25900 will confirm that trend has been reversing on upside. RSI: Momentum indicator RSI has arrived near the zone from where it has reversed many times. So majority of technical indicators suggests that prices are at crucial levels. As shown in daily chart, the entire trend started from mid 2013 is forming double correction pattern where minor wave (c) of second standard correction is ongoing. As of now prices have respected the channel support and has bounced back from 24450 levels but to see positivity in this commodity move above 25900 is required. In short, we think that zone of 24200-24000 is crucial support for Gold. Elliott wave structure along with Time cycles is citing the same possibility that prices might be in bottoming phase. Only a break below 23500 will force us to adopt more bearish outlook. Unless that happens one pullback on upside over next few weeks looks plausible! Indian Currency has continued to move in a boring environment!


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Figure 13:USDINR Weekly chart spot

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Figure 14:USDINR Weekly chart spot

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US Dollar Indian Rupee (63.9792, 64.1702, 63.6700, 63.8171, -0.16290)


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Indian currency has been one of the major outperformers amongst emerging market currencies. It seems that Mr. Rajan has succeeded in curbing down the volatility drastically and we can see that in the price movement over past entire year. USDINR has continued to inch higher slowly and steadily and also crossed above 64 momentarily. There is no strong momentum even after breaking above the crucial resistance levels which increases the odds that wave v is forming Ending diagonal pattern. Ending Diagonal pattern is a corrective impulsive leg which is formed in wave v or wave c. This pattern has each of the legs as corrective in nature which consumes more of time compared to prior impulse moves. The move on upside from the lows of near 58.20 is in overlapping fashion after a near exponential rise in wave iii. Also when wave iii is extended there is high possibility for wave v to be truncated and form Ending diagonal (wedge shaped) pattern. So the wave personality is in sync. The second chart of USDINR shows Andrew Pitchfork channel. This has a median line with two parallel trendlines around it. We can clearly see that prices are drifting higher within this channel and as long as the same remains intact our view will remain same that wave v can continue to move towards 67 – 68 zone but in a slow and steady fashion. 50 weeks Exponential Moving average: This moving average has acted as a vey good proxy for the medium to long term trend. USDINR has been taking strong support near this average for majority of the time. The current support is now coinciding with the Andrew’s Pitchfork channel support near 62. So as long as we do not see a weekly close below 62 with strong momentum the outlook will be that Indian currency will continue to depreciate though volatility can be less. In a nutshell, Indian currency has continued to depreciate in lines with our expectations. However the volatility and momentum has been subdued. The outlook remains same as before that wave v will tend towards equality with wave i which is at 68 but protecting ii – iv trendline near 62 is going to be crucial. Mutual Fund section: Thematic Fund – Betting on India consumption story driven by India large

population Birla SunLife Buy India Fund – Growth Weekly chart


17

2008 2009 2010 2011 2012 2013 2014 2015 2016

20

25303540

45505560

6570758085

9095Relativ e Strength Index (61.4387)

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

105

Top Holdings

EquityAsset %

Sundaram-Clayto 8.15

ICRA 8.14

Bayer CropScien 7.85

Sterling H Res 5.18

Kotak Mahindra 5.07

Asset Allocation (%)

Equity 97.08

Debt 0.00

Cash / Call 2.93

A

B

C

D

EV

[III]

i

i

ii

iii

iv

v

[IV]

Time Cycles 86 weeksO

O

O

Birla Sun Life Buy India Fund - Growth (95.1200, 95.1200, 95.1200, 95.1200, +1.15000)

Birla Sun Life Buy India Fund is a THEMATIC open ended growth plan providing 97.08% exposure to Equity. Portfolio Analysis: Birla Sun Life Buy India Fund is very dynamic fund which focuses on the stocks and sectors which are driven by the large population of country and the natural consumption pattern. The major focus of the scheme is into banking and automative sector which is shown in the given table below.

Returns as on 14th July 2015

Period Returns (%)

1yeay 45.1

3year 33.8

5year 18.0

Risk Profile:- This fund is concentrated in a few sectors and holdings which are from Midcap to Smallcap space. This increases the risk in case of systematic selloff. However, the fund looks promising from the sectors that look to drive the next phase of up move in India and so some portion of investments can be considered. Technical Perspective :- The above chart of Birla Sun Life Buy India fund is not much different than the NAV of other Mutual Funds we have shown before. However, one needs to have exposure to two to three different funds to diversify the risk. Prices look to have completed 5 waves on upside and is currently

Sector %

Banking/Finance 20.03

Automotive 18.83

Chemicals 10.72

Cons NonDurable 9.52

Pharmaceuticals 9.50


18

moving in sideways action. This fund has been outperforming as even during the correction on downside seen on Nifty, NAV of this fund is still near its highs. As per Time cycles we can see another major low by October – November 2015 which is as per 86 weeks of Time cycle and is in sync with our overall view of the market. In a nutshell, this is one of the preferred funds that we would recommend to invest into in the form of SIP for now and if there is opportunity to buy at lower levels than the investment amount can be proportionately increased.

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