A lot has changed since I wrote my previous article in early August. The market at that time was struggling to breakout above the 5,400-5,450 mark and was constantly getting pulled back. The market breadth on every rally was extremely poor and the Banking Sector (which forms close to 25 per cent of the Index) was displaying considerable weakness. The markets finally gave a breakout above this crucial resistance in September 2012 which led to a change in our medium term outlook, to positive.
With many a pullback rallies we have seen over the last 12-18 months, the rally from the June 2012 lows can now be considered the first move up of an uptrend. Since then, the market has been forming higher tops and higher bottoms: a classical bull market sign. Many heavyweights in the index also have given similar breakouts, the likes of ICICI Bank and Larsen and Toubro to name a couple. The strong uptrend in stocks like HDFC and HDFC Bank has only helped propel the rally further. The breakout in the Nifty was on good volumes and was confirmed by the momentum oscillators as well i.e., the RSI (relative strength index) broke the high made during the February 2012 rally and also closed above the resistance level of 60 confirming a medium term uptrend.
The move above the 5,450 mark has had broad participation across sectors which include Banking, especially the PSU banks which have had a smart run from heavily oversold levels, Autos, Cement and Capital Goods. We have witnessed some underperformance from the defensive space especially the FMCG stocks. The Pharmaceutical stocks still seem to be in a secular trend where every correction can be bought into.
After this sharp up move in the month of September, the markets have been trading in a sideways range for over a month which can be characterised as a classic consolidation phase which leads to the market forming a higher base in the event of any subsequent decline. The volumes too have reduced in this consolidation phase further adding evidence to our hypothesis.
As shown in the chart, the Trendline connecting all the recent lows lies in the range of 5,550-5,560. This coincides with the RSI nearing the 40 level which has acted as a support in all the corrections since July 2012.
In the recent correction, the market has taken support in the region of 5,550, which is a positive sign. From a short term perspective, the 5,550 mark is a crucial level for traders to watch. On the upside, once we breach the 5,650 mark we can expect the market to regain the momentum and head towards the previous highs.
The Global markets have had a far steeper correction in the past month and are now pulling back from oversold levels which has helped the market hold on to crucial support levels. In case of any further sell-off in Global markets and breach of short-term support of the Nifty (5,550), we can expect the index to find very strong support around 5,400-5,450 which should act as a pivot.
The medium-term trend of the market remains up and any decline to 5,450 should be used as a buying opportunity.
The author heads Technical and Alternative Research at Nirmal Bang Institutional Equities