Shanghai composite has sold off below 2000 and
the stop loss of my last call had been triggered. Shanghai composite has been
selling off gradually since March 2011. If you observe the chart you can see
that it had hardly given any retracement since the fall started in March 2011. In
last 7 years I have seen many stocks (where underlying fundamentals are
extremely weak) selling off but I have never seen an index selling off like
this. It seems that Shanghai composite won’t find any support before it reaches
2008 -2009 lows of 1700 level.
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| Shanghai composite |
Next chart I am presenting is of Nifty. Nifty
has moved up sharply after a brief correction which I indicated in my post on 17th October 2012. As readers can see from the given
chart Nifty did 23.6% retracement which is 5560 levels while I was expecting a
deeper 38.6% correction at 5416. As I mentioned in that post any
sell off would be a good buying opportunity, Nifty bounced back from there and had made a new high.
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| Nifty weekly chart |
In the third chart we can see that nifty has complete
76.4% retracement of the entire fall from 6350 to 4500 levels. I wrote the following in my post on 29th September 2012 “I have updated my view on nifty in the beginning of this
month when Nifty was trading at 5342levels.
Nifty closed this month at around 5703 i.e. up move of around 7%. Going
forward from there are quite a few possibilities. Going only by chart analysis
it seems that Nifty should move towards 6350 levels. Although there will be lot
of congestion around 5800 -5900 levels.”
Nifty is has touched the fag end of the
congestion level but breaking above 5900 may be difficult for the index. I
think the probability of Index going up to 6350 is more than 60% but Nifty may
see some pull back at these levels. Since market has moved up sharply it would
be advisable for traders to book some profits and wait for appropriate entry
points.
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| Nifty Weekly chart |
Inefficient market hypothesis
Being a follower of technical
analysis I am an adherent believer that markets are efficient only over a
period of time, but they are always inefficient at any given point in time. I
have always felt that assumptions used by theorist to prove their efficient market
hypothesis only occur in Alice’s wonderland. One of the prime assumptions of
efficient market hypothesis is that information is uniformly available to every
investor and is instantly priced in. I found a recent write up by Ashwath Damodaran which I am
sharing with my reader.
You will notice that in fourth
chart that target company stock price starts to increase 2 weeks before
announcement is made public. If the markets were efficient the stock price of
target company should move up instantly on announcement of acquisition but that is not the case. So why would the stock price of target company increase before
announcement is made public?
This happens because information
of the impending announcement is already leaking into the market and someone is
acting on that information and is gradually accumulating shares of the target
company. Source of such leakage could be
friends and relatives of auditors, employees, lawyers, consultants etc.
One of the basic assumptions of
technical analysis is price discounts everything, which means that all
published and unpublished information is reflected in the price through actions
of market participants. That is why technical analysis is able to predict price
movements even when there is no apparent news in the market.
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