The medium-term trend for the market remains down. The rally in June seems to be one of the many pullbacks we have seen over the past 12-18 months, but we see no incremental evidence that the market is ready for a more sustainable upmove this time around than it has in its many recent pullbacks.
The short term has been a nightmare for technicians in this phase (as it always is in bear markets), with a lot of short-term breakouts failing and major breakdowns being bought into (the market broke the critical support range of 4,700-4,750 before sharply rising to 5,600 in February 2012). The sharp rally in February got market participants excited as the Nifty broke out of the bear market channel it was trading in over the past year but a re-entry into the channel in May (as shown in the chart), constitutes a ‘false’ breakout, as the market did not achieve the pattern target of 6,000 before slipping back into the channel (pattern target of the channel breakout can be derived by adding the width of the channel to the breakout point).
The weekly chart of the Nifty is shown here. The fall in August 2011 was a breakdown from a head & shoulder pattern, which is a bearish reversal pattern. This breakdown was confirmed by the relative strength index (RSI) oscillator as it broke the critical level of 40, thus entering a bearish range. Since then, all pullbacks in the market have faced resistance when the RSI is near the 60 level. Even the sharp rally earlier this year could not breach the momentum resistance and the Nifty faced resistance near the 5,650 level, also the neckline of the head & shoulder pattern. The recent upmove in June also lost momentum near the RSI level of 60.
The fall in May 2012 was led by the usual sectors like metals, capital goods and banking, while pharma and FMCG continued to outperform. There is still no sign of relative strength from these beaten-down sectors. Even in the June pullback, we saw pharma and FMCG stocks continue to make life highs as the broader market continued to struggle.
As a silver lining, the market has not breached the December lows (4,550) in the recent fall of May and is making a higher bottom (4,770), breaking the sequence of lower, top, lower bottoms. Thus, the market has changed its trajectory from a steep downtrend to a triangle-like formation.
The key resistance for the market is now 5,400, the trendline connecting the two major peaks of 6,300 and 5,600 (as shown). Till then, the trend in the medium term can be assumed to remain down. The pullback rally in June did manage to get past the short-term resistance of 5,200 but lost steam near this critical resistance and turned down again. We believe the market will face headwinds near the levels of 5,260 in the very short term. On the down side, the market can find support near the levels of 4,860. The global market picture is not very promising as well, with the EUR-USD in a clear downtrend, which should keep risk assets across the globe under pressure. To summarise, the medium-term outlook on the market remains cautious and the critical level to watch for a reversal on the upside remains 5,400.
The author is head — technical and alternative research, Nirmal Bang Institutional Equities