The bear hug on the Indian markets is tightening as more sectors continue to fall and trade below key bear threshold levels. The bearishness is seen on long-term charts, giving an indication that the downtrend can continue.
Over the long term, the markets tend to move in four stages. Professional investors look at the four stages of the market to make investment decisions. The four stages are market bottom, rally, market top and sell-off. Generally, markets tend to move sideways in the bottom and top phases, but sometimes they may not. For instance, in the March 2009 bottom both the Indian and US markets did not consolidate and rally, but made a “V” shaped bottom and rallied strongly. However, the Sensex and Nifty formed a nice sideways pattern after topping in November just as the US markets moved sideways in 2002-03 during the bottom phase before rallying out.
The charts now show that the Sensex, Nifty and several sectors have topped and moved to the sell off phase. This is not only shown by price, but the 30-week simple moving average (SMA), which is a crucial tool used by investors to form a bullish or bearish bias, when trading the four stages of the market. So let us list the factors investors use to make trading decisions.
| SECTOR OUTLOOK | |||
| Index | 30-week SMA slope | Price to SMA | Status |
| Sensex | Down | Below | Bearish |
| Nifty | Down | Below | Bearish |
| Auto | Down | Below | Bearish |
| Bank | Down | Below | Bearish |
| Cons. Durables | Flat | Above | Neutral |
| FMCG | Up | Above | Bullish |
| Health care | Down | Above | Neutral |
| IT | Flat | Below | Neutral |
| Metal | Flat | Below | Neutral |
| Oil and gas | Flat | Below | Neutral |
| Power | Down | Below | Bearish |
| PSU | Down | Below | Bearish |
| Realty | Down | Below | Bearish |
| Mid cap | Down | Below | Bearish |
| Small cap | Down | Below | Bearish |
| Capital goods | Down | Below | Bearish |
To form a bearish bias the market has to: move sideways after a rally; fall below the lowest price point in the sideways rally; trade below the 30-week SMA; and finally, the 30-week SMA must slope down.
The reverse is true to form a bullish bias.
A look at the broad market index and sectors show the bearish bias firmly in place.
SENSEX AND NIFTY BEARISH
The Sensex and Nifty after peaking in November of last year went into consolidation. However, after the Sensex broke 19,000 and the NIFTY fell below 5,700 the consolidation pattern was broken to the down side. The prices too moved above and below the 30-week SMA, but the average itself did not slope down till recently. Now the prices are below the 30-week SMA and SMA is sloping down indicating that the broad markets have turned bearish.
The table below gives the status of the index and sectors in the Indian economy and provides links to the chart.
TRADING STRATEGY
The strategy to invest using the four stages of the market is to stay bearish after prices move below the 30-week SMA and the average slopes down.
Investors short the market whenever prices rally up to the 30-week moving average. On the other hand, one can buy when prices are above an up sloping 30-week SMA and correct back to the average. Also, steeper the slope greater the momentum of the trend.
In the case of the Indian market, most sectors are bearish, some neutral and just one bullish. One should focus on the bearish sectors to find areas to short. FMCG is bullish with both the SMA sloping up and price above it, but that does not mean one should buy into the sector. In a bearish market, it’s best to ignore the bullish sector. Shorting the neutral sectors are fine too. In the case of consumer durables and health care, even though prices are above the SMA, the status is neutral as average is flat or sloping down. All the factors must be true to form a bullish or bearish bias.
Finally, since many of the sector indices are not traded on the futures market, one should look for bearish stocks within the sectors to short.
The author is based in Chicago and is the editor of www.capturetrends.com
