Where are the markets headed?

After moving in a range for almost a year, the two popular indices have finally broken out on the upside. Global concerns and a weak economic recovery in key developed markets resulted in the markets remaining indecisive in recent quarters. Positively, though, India has been among the favoured investment destinations, due to its strong economic growth, which also saw it outperform the other key global markets. For now, the Sensex, which moved between 15,400-18,000 or a 2,500 band since August 2009, has convincingly crossed the 18,000 mark in the last few sessions and closed a shade over 19,500 on Wednesday. The question now is where the markets are headed. Two technical analysts scan the charts and provide their views on the outlook and what you should do. Read on to know more.

Correction before next major upmove
Devangshu Datta

The long-term technical perspective improved as the Nifty broke through a major resistance and lifted to levels not traded since January 2008. Background signals were good. Volumes were high, the advance-decline ratio was positive. The key banking, information technology and metal sectors drove the broader market.

Historically, there is relatively little trading between 5,600 and 6,000. The breakout appears genuine. It can be projected to targets of anywhere between 5,900 and 6,500, depending on time-frame and optimism.

The minimum projections of 5,850-5,900 have already been achieved. A longer-term interpretation is based on the fact that the intermediate uptrend started in late May at 4,786 (base); the breakout is above congestion at 5,650-5,700. This projects to a target of 6,450-6,500.

There is lot of resistance between 5,900 and 6,000. Above 6,000, resistance is more patchy, but there will be selling pressure at every 50-75 point interval. But projections of all-time highs above 6,350 are not outrageous – by definition, a bull market hits new highs. The Bank Nifty and IT indices are both at all-time highs.

However, that’s long-term. Before that, a correction is due. A short-term pullback would end around 5,650. Fibonacci retracement calculations suggest an intermediate correction with successive pullbacks depending on severity to levels like 5,600, 5,450, 5,325, 5,200, over 4-8 weeks. This also means the market should be in its next up move by November-December.

My interpretation is that the market is most likely to abort this particular up move between 5,900-6,000 within September settlement and then head into a correction, which will not last very long. The recovery in the next intermediate uptrend could push prices quite a bit higher by year-end and to new highs between January-March 2011.

This is a strongly trending market. Follow it by using daily moving average (MA) systems, with a short average as the second signal line, following price (I’d suggest 10Day MA—DMA). Use a longer 20DMA as a third signal line. Stay long if the price is above 10DMA and the 10DMA is above the 20DMA. Close long positions if the order changes. Short only if the price drops below the 10DMA, which in turn, drops below 20DMA. This MA crossover is simple. It will offer good buy-sell signals if the market stays trending. There are some areas of discomfort. One is split institutional attitude. While FIIs have been very positive, domestic institutional investors have been net sellers through the rally. The second point is statistical; the Nifty is at 24.5 PE. Valuations above that are sustained just about seven per cent of the time.

The author is a technical and equity analyst

Forget absolute levels for the present
Mukul Pal

After a 20 per cent year-to-date returns on the Nifty and ending the third quarter (September), the most important question that rules the majority of market participants is, “Aare we in a runaway market?” Such is the power of absolute returns that even after 18 months of a flat Nifty, it’s the benchmark that rules all our attention. And, it does not end here; we are also interested in where the Nifty will end this year.

Behaviourologists have illustrated that giving a level for Nifty (an asset) for a duration (end of the year) is overconfidence. Ask a group of people where you think markets may end in December and you just might have most of them with a level. Many of the values will be clustered and a few at extremes. Very few of the answers might be in a range and most of them in narrow intervals. The narrower the interval, the more the over-confidence level and the more the confidence level, more the emotional error. It’s a vicious cycle.
 

SECTORAL OUTLOOK
	Rank
BSE Consumer Durables	3
BSE Bank	12
BSE Auto	20
NSE Nifty	26
BSE 500	27
BSE Sensex	28
BSE Capital Goods	30
BSE Metals	32
CNX IT	34
BSE Healthcare	39
BSE Oil & Gas	41
NIFTY VIX	53

Numeric ranking: Low numbers indicate best performance and high numbers worst performance. And because performance is cyclical, the best should underperform and worst should outperform

We believe one can beat (outperform) the benchmark if one shifts from absoluteness to relativeness. Now, instead of talking about Nifty, if one would look at the relative ranking of 54 top assets, one would see that Nifty VIX is at the bottom of multi-week price performance. This means a single asset portfolio of Nifty VIX had the worst possible performance in a group of 54 assets.

If markets and time are mathematical and ordered, we should see a rise in market volatility in the coming days and weeks and potentially into the fourth (December) quarter. Rising volatility is rising fear and rising fear suggests the Nifty should exhaust, not strengthen.

So, simply speaking, while the Nifty may or may not go beyond 6,000-levels in the weeks ahead, the relative ranking system suggests the markets are on over-complacent grounds and the only sectors that will best weather a potential spike ahead are oil, healthcare, CNXIT and metals. To understand which of the sector peers to be in, we have to look at the relative rankings of sector components. We did a similar exercise between global assets and the indicators suggest the Nifty we are paying so much attention to should relatively underperform the Dow 30.

This should be more important information than where the Nifty is heading by December. What you should be interested in is that your London portfolio could do better than your Indian portfolio. But to digest this information, you need a change of mindset from absolute year-end Nifty levels to the relativeness of Nifty to everything else. See table to know the potential best and worst performers.

The author is CMT and CEO of Orpheus CAPITALS, a global alternative research firm