The chart pattern is bullish and a breakout past 5,400 on the Nifty could push it to 6,000+ levels.
Between March 2009 and April 2010, the market trend was clearly bullish. The Nifty moved up from 2,600 levels to a 26-month high of 5,399 on April 7, 2010. Since then, it’s been range-trading between a low of 4,786 (May 25) and multiple tests of resistance in the 5,300-5,400 zone.
The resistance is not surprising. The long-term pattern shows an inverted head & shoulder (H&S) formation with a neckline in this area. Inverted H&S patterns are bullish, but serious volume expansion is required to rise past the neckline.
If the chart pattern is valid, the market will jump as and, when it does, it will breakout past 5,400. A breakout above 5,400 could lead to a target of 6,000+. There is relatively little resistance between 5,400 and 6,100. The market moved fast through that zone, both in the 2007-08 upswing, as well as the 2008-09 downswing.
There are some indications the long-term trend remains bullish. But, there are also worrying negative signals. Positively speaking, the uptrend is backed by a rising trend-line (see chart: Headed Higher) connecting higher lows. Every intermediate correction since July 2009 has terminated higher. Second, breadth signals are good with decent volumes and good advance-decline ratios.
The dance below DMAs
One worrying factor — the Nifty dropped below its 200-Day Moving Averages (DMAs) in May 2010 during the last intermediate correction. It has recovered and is now trading well above the 200-DMAs. But that dip suggests the trend is not entirely healthy. Another worrying factor is that two high-weighted sectors — infrastructure and realty — are bearish.
The 200-DMAs are at 4,960 (Exponential, or EDMA) and 5,070 (Simple - SDMA). Ideally, the long-term trend should stay above 5,070, or find support between 4,960 and 5,070. (The EDMA lagging the SDMA is often a bearish near-term signal). The secondary support that's critical is 4,785. If 4,785 is broken, a moving-average sell signal will be confirmed by lower intermediate lows.
Those benchmarks help set trading rules. Support at 5,070, 4,785 is critical. Resistance between 5,300 and 5,400 is critical. If the market range-trades, it should stay within 5,070-5,400. A breakout above 5,400 would be positive. On balance, the long-term trend seems positive. But the intermediate trend could remain choppy for several weeks, or even months.
Looking at subsidiary indices, the Nifty Junior and the CNX500 are both doing somewhat better than the Nifty, which means good breadth. The CNXIT and the BankNifty (two key sectors) are doing as well as the Nifty. The CNXIT outperformed through 2009, but it seems to have settled down. As mentioned before, the CNX Infrastructure index is bearish, and so is the Realty index.
Of FIIs and rates...
Apart from chart-level signals, a few macro factors can be easily tracked and interpreted with some confidence. There is a strong correlation between foreign institutional investors’ (FIIs) attitude and market direction. The FIIs have been moderately bullish in the past six months with net buying of Rs 3,914 crore in CY10.
The FII pattern has been alternate months of buying and selling with Rs 12,071 crore of net sales in May and Rs 7,714 crore of net buys in June. If they indulge in two months of consecutive heavy selling, the market could go bust. Alternatively, two months of heavy buying may trigger a breakout.
Another factor is interest rates. This is a negative variable since rates could raise the given inflation. But an argument can be made that real interest rates are negative and lagging inflation. On the fundamental side, price-to-earning (PE) ratios have reduced in the past six months due to earnings growth.
So, we remain cautiously positive. The market should continue to make net gains through CY10. Importantly, a trader has clear benchmarks to track on both upside and downside. So, he can stop-loss or hedge accordingly.
