MOVING SIDEWAYS
Devangshu Datta
Where is the market likely to head in the next six months to a year? This question is difficult one primarily because there have been big trend reversals in the recent past. In succession, there’s been an extreme bull market, an extreme bear market, a period of consolidation and a revival.
In January 2008, the Nifty moved to an all-time high of 6,357 points. By end-January, it was sliding and by March 2008, it was down 20 per cent and in a confirmed bear market. By October, the index was testing support at 2,300, and down by around 65 per cent from its peak value.
Then there was a six-month period of consolidation when prices moved sideways. In March 2009, the market started moving up again, from around the 2,500 level. In early June, it unsuccessfully tested resistance at around 4,700 and went into another short-term correction that seems to have ended around a week ago.
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The major trend seems to be bullish. Many signals back an optimistic view. Breadth in terms of advancing shares has been strong – most classes of stocks have participated in the rally. Volumes have been excellent and coincided with the revival in prices.
The confirmatory indicator of the 200 Day Moving Average (DMA) has been penetrated comfortably and chart patterns suggest that a further breakout has occurred after the 200 DMA barrier was crossed. Momentum indicators have been good. Daily volatility has been in the range of 100-150 points per day and it is likely to stay within that zone regardless of market direction.
The market has completed a bullish saucer pattern, with a flat bottom in the region of 2,550 (if we ignore one intra-day drop of 2,252 in October 2008) and a saucer-rim at around 3,900-4,000. Such a pattern projects to targets of between 5,000 and 5,300. Assuming that 5,300 is hit with further volume expansions, an inverted head-and-shoulders pattern will be completed and that would mean a target of around 7,500.
But that may take longer. In the time period of the next six months to a year, the optimists would expect the Nifty to move into the price range of 5,000-5,300. Of course, this means beating resistance at 4,693 (the 2009 high which came on June 12) and several bands beyond that.
This trend projection also naturally assumes that the major trend doesn’t either lose momentum or reverse. There will undoubtedly be intermediate corrections – the Nifty dropped from 4,693 (June 12) to 3,918 (July 13) for instance.
The pessimist would be wary of the following price-signal apart from the red flags of low breadth and low volume. The key support for the major trend is between 3,700 and 3,900. The 200-day exponential moving average is around 3,750 and the first Fibonacci retracement level of the March-June 2009 move is between 3,760 and 3,870 depending how it is calculated. The market must stay above 3,700 for the long-term bull-market to stay alive. If the Nifty does drop below 3,700, the chances are, it’s a new bear market.
It is also possible that the market will not beat resistance at 5,000 while staying above support at 3,900. In that case, it is likely to oscillate between 4,000 and 4,700. A look at option open interest patterns suggests that a lot of smart money is focussed in this zone.
Among subsidiary sector indices, the CNXIT and the Bank Nifty are likely to move in tandem with the Nifty but with exaggerated betas. The Bank Nifty in particular will outperform on the upside while losing more ground in every correction. Incidentally, both the NMCXIT and the Bank Nifty hit their respective lows in March 2009 rather than October 2008 which is when the Nifty bottomed. The Realty sector may lag the overall market – it has not yet confirmed a major trend reversal and is still hovering around its 200 DMA levels.
A different way to judge expectations is to look at the open interest (OI) in the Nifty options market’s long-term series. Considering the December 2009, March 2010 and June 2010 series, most call OI is at breakevens ranging between 4,600-4,700 with some OI between 5,000 and 5,200 as well. For the same expiries, the put OI is clustered between breakevens of 4,000-4,200 with another cluster at 3,650-3,900. This suggests that most long-term hedgers believe the trend will not reverse into a bear market but the bulk of the money is on sideways movements between 4,000 and 4,700.
The author is a technical analyst
BULLS HERE TO STAY
Vijay L Bhambwani
The tone and tenor of the markets has changed drastically from May 18, 2009. The markets were subtly changing gears at least seven weeks earlier and received a steroid shot after the election results were out. The Nifty managed to breach the 4,450 level that week but closed below that threshold. The reason why 4,450 is a critical level for the market is because this level proved to be a support for the Nifty in calendar year 2008 on two occasions. Once violated in June 2008, the markets fell rapidly and sharply. That event is still fresh in traders’ minds and is likely to remain so. Therefore, it is important that the Nifty spot remains above this make or break level of 4,450. If the criteria is fulfilled, the bulls have a mandate to buy further and the resultant bear squeeze is likely to push markets higher with some degree of acceleration.
This upmove needs to be watched keenly as the upthrust needs to be broadbased and the average ticket size per average trade needs to rally in tandem with the benchmark indices. Should there be any negative divergences, it would signal a chink in the bulls’ armour and the markets may witness a laboured upmove or even bouts of profit taking at higher levels. In case of declines, the immediate support will be seen at the 4,100 area and then at the 3,875-3,675 band. Downsides are likely to be cushioned by short covering and fresh buying emerging at lower levels. In the event of the 4,450 being overcome on a sustained closing basis, the hurdles on the upsides are likely to be seen at the 4,650-4,850 band. The closer the Nifty gets towards the 4,800 levels, the greater will be the overhead supply as faint hearted bulls exit from long positions that are either breaking even or the losses are at acceptable levels. I would cheer the markets without a shadow of doubt of a reversal (emergence of a new bull market) after the 4,850 hurdle is overcome and the Nifty starts keeping its head above this threshold. Volumes and open interest must rally in tandem with the prices and so must the average ticket size per trade as mentioned earlier.
In terms of leadership, the markets are likely to be led by the power, infrastructure, consumer staples, cyclicals and FMCG sectors. Technology stocks will continue to witness demand but will encounter some bouts of profit sales as US markets gyrate to economic data. For traders, the default choice will be Nifty futures but a basic asset allocation technique maybe incorporated here. On days that the Nifty 50 is rallying strongly and the Bank Nifty and CNX IT are rallying in tandem, allocate higher amounts to longs as the rally is secular and therefore more likely to sustain. On days, the Bank Nifty and CNX IT are lagging behind the Nifty 50, go long but cut back on the exposure limits.
In terms of correction, the price wise correction is over and done with. The time wise correction seems to indicate some more period of waiting as the markets are likely to witness a higher trajectory in the calendar year 2010. The rate of appreciation too is likely to be higher in 2010 as the participation levels are likely to get a fillip. The sum and substance of my view is to remain biased towards the long side and take a patient view of the markets.
A technical analyst, Vijay L Bhambwani is the author of A Trader’s Guide to Indian Commodity Markets
SHORT SENSEX LONG NIFTY
Mukul Pal
If short S&P 500, long Dow is absurd, what you are going to read below should be shocking. We will be taking you through pairs and performance cycles (a term coined by us) on the Indian capital markets. Performance cycles work because of time fractals. This is what we said in our annual India outlook 2009.
| PAIR PERFORMANCE | |||||||
| Asset I | % change in Sensex (1)* | Asset II | December 31 | March Lows | Change % | Absolute % (CHG I-II) | Annualised % |
| SENSEX | -16.59 | NSEI | 2959.00 | 2539.00 | -14.19 | 2.39 | 2.45 |
| SENSEX | -16.59 | BSEMETALS | 5214.00 | 4408.00 | -15.46 | 1.13 | 1.15 |
| SENSEX | -16.59 | BSEOIL | 6050.00 | 5525.00 | -8.68 | 7.91 | 8.09 |
| SENSEX | -16.59 | BSEHC | 2966.00 | 2490.00 | -16.05 | 0.54 | 0.55 |
| SENSEX | -16.59 | BSEFMCG | 1987.00 | 1781.00 | -10.37 | 6.22 | 6.36 |
| SENSEX | -16.59 | CNXIT | 2187.00 | 1993.00 | -8.87 | 7.71 | 7.89 |
| SENSEX | -16.59 | BSEREAL | 2274.00 | 1297.00 | -42.96 | 26.38 | 26.98 |
| SENSEX | -16.59 | BSEPOWER | 1829.00 | 1581.00 | -13.56 | 3.03 | 3.09 |
| SENSEX | -16.59 | BSE500 | 3596.00 | 2961.00 | |||