The Nifty has been pulling up leading to a time correction on the longer term scale. Labelling the Elliot Wave counts, we learn that the peak of February 2012 at 5,650 was just a corrective wave to the fall that happened from 6,340 to 4,530. The figure of 5,650 came out by taking a 61.8 per cent Golden Ratio Retracement of the movement and Nifty respected that level by a halt. The rally of January-February 2012 was a very short tenure for a corrective wave to complete in front of the decline from November 2010 to December 2011. So, the current rally is expected to extend to a maximum of 5,650 without spoiling the longer term pattern and the downside is open to one of the highest horizontal volume area of 5,000.
Nifty in dollar terms has provided good indications in the past with the throw in May 2012 being exactly at December 2011 low of $85, leading to a formation of Double Bottom. When the index has been moving higher, it is expected to find resistance at the previous peak of $99. Until the index is able to sustain above that mark, sentiments can be sluggish from foreign funds flows.
India Vix has moved to a multi-month low at 16 along with the Global Vix, which is sliding. Nifty has historically seen a negative correlation with India Vix and a falling Vix has been supportive for the market. If Vix breaks out above 19, Nifty will face a significant risk of downside.
Inter-market indicators have been dicey with falling global volatility, leading to decreased correlation across markets. Emerging markets have historically witnessed positive correlation with commodity prices and the CRB Index has been reporting higher highs. However, we feel the longer term trend in the CRB Index is negative and a fall below $298 can pull the trigger for a sell-off across emerging equities.
The dollar index is placed crucially and a breakout above $85 will be a call for depreciation of all major currencies against the dollar. In that case, longer term picture for USD/INR will be expected to break out above 57.5/$ calling for depreciation in the rupee.
A relative strength chart scaled on all major indices across the globe suggests India has been outperforming in relative terms and is placed as a leader. Though the outperformance may not continue for long, the short term scale does not rule out an uptrend of another 200-250 points.
Nifty, in the weekly scale, closed in the green for the fourth consecutive week and the last candle can be termed as a Shooting Star. This pattern has been formed after a healthy northward movement of 416 points. The pattern will be activated in the case of sustenance below 5,360 and the development can have bearish implications for the next 100 points. It will be a call for Nifty to enter a time correction with important support placed at 5,220.
Relative strength is weakening in banking, pharma and FMCG suggesting mild profit booking. Fresh long build-ups are being witnessed in media, infrastructure and energy. PSU banks have been lead underperformers and sentiment could be hampered for private banks as well.
Strategy for short-term traders should be initiation of fresh longs at a favourable risk/reward, i.e. when Nifty pulls back below 5,260 with a stop placed at 5,220 on a closing basis. Long-term investors can look for the ultimate support on the longer term scale at 4,980. If India Vix flares above 19 or Nifty falls below 4,980, odds for the start of a downtrend will increase and long positions should be squared off. On the upside, profits can be taken in the band of 5,600-5,650.
The author is head, technical equities, and associate vice- president, Motilal Oswal Securities
