NIFTY AT CROSSROADS - MAKE OR BREAK ?

PROLOGUE

A strong rally that commenced in May 2010 helped the market to break out of its shackles and register levels in excess of 6300. This euphoric upmove has now given way to a corrective spree. Nifty has retraced about 700 points in the last three months with a fair degree of volatility.

The question that we are trying to address here is – Is it an intermediate bear market or a routine correction.

The report tries to outline objective answers to the above question with technical rationale and suggest an appropriate action plan.

Nifty is trading in close proximity to its 200 DMA which is currently stationed at 5605. The slope of this average continues to be positive indicating a high probability of resumption of the trend. A breach by a couple of percentage points however cannot be ruled out.

Conventional wisdom states that a breach of 200 DMA signals a bear market. However, empirical evidence suggests minor breach of this average is a great entry point in an ongoing bull market. The trend changes only on the establishment of a peak below the 200 DMA, which is clearly not the case right now.

The green line represents the struggle of the market to break past 5500. A role reversal is witnessed when such strong resistances are conquered i.e this line is now likely to act as strong support. Due to its positive gradient, the support has shifted to 5600 odd. Minor whiplashes do not change the sanctity of such important levels. A violation in excess of 3% however would be a cause of concern.

The ‘RSI’ is largely moving with the price plot and hence not throwing up any clues about the trend.

‘MACD’ histogram is showing a positive divergence. This hints at the possibility of a bottom formation very soon. However, one needs to note that if the market garners further momentum on the downside, this perceived divergence may cease to exist.

Oscillators seem to be oversold. This once again hints at the possibility of a revival in the days to come.

Nifty topped out around 6300 (rally that started in May 2010) with a five wave sequence showcased in Fig 4.A significant portion of the gains registered by that impulse has been retraced by the current correction in a ‘zig zag ‘formation. Notice the hump formed on MACD histogram marked out in a circle – Clear indication of a ‘B’ wave. The adjoining diagram shows the wave count on the hourlies. A closer look reveals that Nifty is amidst wave 5 of wave C. This indicates that the market is in the fag end of this correction and the first sign of strength may be construed as a buying opportunity.

5600-5700 zone seems to be a very good pivot on the following counts : (a) Proximity to 200 DMA (b) Erstwhile resistance now acting as support (c) Oversold oscillators and perceived divergence (d) Wave C in its 5^th wave.

However, it is important to remember that the level of 5690 held out on three occasions before succumbing to the bear onslaught. Breaking of such important support levels may lead to sharp sell offs. Hence outright initiation of longs could misfire.

The idea is to initiate longs once the momentum in the sell off subsides. This can be signaled by a move above 5730. A stop of 5638 would come in handy for the longs initiated around 5730. Rationale for the stop : If 5638 gets violated after reaching 5730, it would amount to a whiplash rather than the resumption of the uptrend. THIS WOULD MEAN THAT THE MARKET MAY GO INTO A LONG TERM SIDEWAYS MOVE / TRADE WITH A NEGATIVE BIAS.