Shock and Awe – this time in reverse.

Just 10 days ago, on Sunday night, the full might of Governments in the Euro zone was on display when the one trillion dollar bailout was announced. The principle was: use a bazooka to disarm the pessimists. It worked for one day when markets opened 3 to 4 percent higher. Quickly, the shock and awe was replaced by uncertainty.

Now comes shock and awe in reverse. Mr Market, or Ms Market to be politically correct, is not a collection of governments. The Market does not have powerful weapons. It is only the collective judgement of market participants – a David in front of Govt Goliaths. But the Market feels that this bailout recovery is no good, there are problems in Europe and China which will affect the world. Therefore, in its wisdom, the Market has decided to stay away from risk assets – equities and commdities.

Now, dear readers – open the chart of any midcap which has seen a rally in the past 12 months. Just to pick a random example, I open up Themis Midcare – a stock that rallied from 48 in feb 2009 to 300 in April 2010. Suppose a normal 61.8% retracement were to take place – then the pullback will be155 points, bringing the price down to 145. This is the story with all midcaps, smallcaps, and, many large caps.

Proof: Technical Analysis works:

I have ben consistently bearish on Educomp. I have nothing against the company, my sense was that valuations were high, and, around 800 its price chart also started saying the same message. Since then, this has been my favorite sell. Today, the stock was quoting at 500. Now where can it go? I leave this as an exercise to readers. Open a weekly chart of the stock and check out the starting price levels and the peak which it touched in 2009, fourth quarter. What is the possible retracement?

I say that credit for this analysis goes to technicals because while I was bearish, I heard many fundamental analysts go overboard in their praise for this stock. In fact, the same story applies to Hind oil Exploration. When the share price was going up, TV anchors (not Udayan & Mitali, who are probably one of the best business anchors in the world) were high flying singing praises of the share. At 350, I suggested that buyers should wait for at least 250 before thinking of buying. I was treated as untouchable – a person who was deflating the big feel wonderful balloon. Now, at 185, we do not hear any talk of Hind Oil Expl on TV. I wonder why?

Take Care.