Wednesday, February 8, 2012

Nifty mid-week update: bears defend 5400

The bulls seem to be facing a ‘last mile problem’ on the Nifty 50 chart – as the 5400 level is being well-defended by the bears. What is so great about the 5400 level? Quite a bit – if you are a regular follower of the technical analysis posts on this blog.


For starters, 5400 was a previous top in Apr ‘10 (and again in Oct ‘11). Previous tops have a tendency to act as support/resistance levels. In last Friday’s post, four technical definitions of a bull market were discussed. Two of them are of interest in the context of the 5400 level.

One, a 20% rise from the Dec ‘11 low of 4531 gives a level of 5437 – close enough to 5400. Two, a 50% Fibonacci retracement of the entire fall from the Nov ‘10 peak of 6338 to 4531 gives a level of 5434. To satisfy the technical definition of a bull market, the Nifty has to close above these two levels.

There is another point of technical interest mentioned in last Sunday’s post. Note the blue down trend line that dominated the Nifty chart for the past 15 months, and got breached on the upside during the recent rally. An upward breach of any resistance level is technically valid provided it closes at least 3% above the point of breach.

The down trend line was breached on Feb 1 ‘12, and the point of breach came at about 5220. A 3% higher close means a level of about 5370. In technical analysis, exact levels are not important. Approximately, 5370 is close enough to 5400.

Despite an intra-day breach of 5400 on Feb 7 ‘12, the Nifty has so far failed to close above 5370. Obviously, the bears understand and follow technical analysis and are putting up a fight to defend the 5400 level.

Who will win the battle? Will the bulls propel the Nifty above 5400 soon, or will the bears push the Nifty back into its down trend? What do readers think?


Mumukshh Ki Rachanain said...

Dear Sir,

Market is the boss.
Boss is always right.
Whatever it will do, will be the correct only.
In this market, readers view have no meaning...........
Possibilities are only two i.e. either bull will win or Bear will win....
So one has to be correct in next few days.....

Chandra Mohan Gupta

Din said...

leave technicals a breathr n follow FII for a while ... and trade

Sanjeev Bhatia said...

Hi Subhankar da,

Fundamentally, I don't think there is much change to warrant a sustained rally. It is only liquidity (with which you can't argue) which has been feeding this rally. Ground realities remain the same as were 3 months ago. CRR ratio has further led to (unjustified)boost. It does not make much positive move for banks since interest rates are still at previous higher levels and there is much reduced offtake and banks are already having cash in abundance but few takers. Inflation levels are down because of base effect and also due to seasonal inflow of vegetables etc due to which food infaltion was down. Fiscal deficit is too much on higher side and given the voting season, populist measures are going to be a dime a dozen, fiscal health be damned. We have A deaf mute prime minister, that too in absentia, no credible opposition, scams galore, irresponsible babudom, passive public and no reforms in sight. All this is enough to scare a long term investor, be cautius and adopt wait and watch policy.

Technically, yes, we haven't breached the 3% leeway levels yet. Both RSI and stochastics have been continuing at overbought levels for quite some time now and there is nice negative divergence in both of these. Although nifty is making higher highs, both RSI and stochastics have failed to make higher tops, indicating impending correction. Nifty PE is at higher levels (19.14 as on 8th feb)although still way below bubble zone.

Final Call...? You can't argue with money or price levels, the ultimate indicator. Till the time money is sloshing around, all technicals can be put to sword. Continuing my SIPS, no fresh investments, weeding out the duds in this rally and dusting off my watch list.


Sanjeev Bhatia

Prem Lulla said...

Thanks a lot for your regular posts. I enjoy reading your articles and your views do provide us laymen with a very clear view of the markets,

Nobody can predict the market, but one can definitely read the market as to what is taking place there , which you are clearly doing with accuracy.

Sanjeev Bhatia said...

You can't argue with money...LOL

3% leeway finally seems to have beeen conquered. Are we in a bull orbit now?

Salil said...

Finally closed above psychological level of 5400. Seems uptrend is here to stay for some more time.


Subhankar said...

@CMG: If you allow the market to dictate to you, your portfolio will be in trouble! Only you should be the boss of your portfolio.

I prefer to look at the market as a slightly eccentric uncle who buys you sweets for no reason at all, and boxes your ears when you think you have done something important. My energies are directed towards assessing this crazy uncle's mood, so that I don't get my ears boxed!

@Din: Isn't it interesting that despite heavy FII buying, the Nifty is struggling to cross the 5400 level? If you give technicals a breather, you will not know what is going on. The fundamentals certainly didn't trigger this rally.

@SB: Very pertinent observations. The battle for the Line of Control (5400 on the Nifty) is going on. That is mainly of entertainment value. Stick to your plans through thick and thin, and you will succeed. As a sage once mentioned: The real Kurukshetra is in your heart!

Subhankar said...

@PL: Appreciate the kind words.

@SB: Only one day's close above Nifty's 5400 level so far. We need to see a few more closes above 5400 before declaring victory to the bulls. That may happen sooner rather than later. But it must happen.

@Salil: "One swallow doesn't make a summer" is an old English proverb.

We may already be in the early stages of a bull market. There should be a decent correction to the 20% rally from the Dec '11 low. A higher bottom than 4531 may propel the market much higher.