A mid-week Nifty update

In last Sunday’s post on the Sensex and Nifty chart patterns, both bullish and bearish possibilities were discussed. Based on the technical indicators, the correction was likely to continue, but the bulls were expected to put up a fight near the blue down trend line.

On Monday, May 7 ‘12, the Nifty dropped below the ‘falling wedge’ pattern to an intra-day low of 4988, but the postponement of GAAR provisions to the next financial year by the Finance Minister caused a sharp pullback inside the wedge. The index managed a higher daily close above the 5100 level.

It seemed that the GAAR clarification had provided a positive trigger for the bulls to emerge from hiding. But FIIs were not too impressed. Two issues seemed to bother them. First, the results of the elections in France and Greece – where leftist leaders managed to translate their anti-austerity rhetoric into votes, pushing the Eurozone debt problems back on the centre table. Second, the determination of the Finance Minister about amending existing laws that will circumvent the Supreme Court’s judgement against taxing Vodaphone.

If France and Greece go back on the austerity commitments made by the previous regimes, the Eurozone will be thrown back into turmoil – which will affect Indian exports. More troublesome is the amendment of laws to give retrospective effect to tax demands. FIIs will think twice before investing any long-term funds in India under such uncertainty. Since FII buying was responsible for the rally from the Dec ‘11 low to the Feb ‘12 high, it is feared by market players that a reversal of the flow can push the Nifty back into a bear market.

For the past couple of days, the Nifty closed below the ‘falling wedge’ but received support from the blue down trend line that had ruled the Nifty from Nov ‘10 to Jan ‘12. There are three possibilities of what the Nifty can do next:

1. The index will drop below the down trend line and seek much lower levels. The 20 day EMA has already dropped below the 200 day EMA. The 50 day EMA is likely to do the same, and technically confirm a return back to a bear market after a brief foray into bull territory. All four technical indicators are bearish. The MACD and the ROC are negative. The RSI and the slow stochastic are in their oversold zones.
2. The Nifty may bounce up from the support of the down trend line. Why? Note that the ROC and the slow stochastic, though bearish, have touched slightly higher bottoms as the Nifty touched lower bottoms. The positive divergences may lead to an upward bounce. Also, look at what happened after the RSI entered its oversold zone back in Jun ‘11, Aug ‘11 and Nov ‘11. On all three occasions, the Nifty bounced up – only to face more selling pressure.
3. The Nifty may continue to slide above the down trend line with periodic upward bounces without falling below the trend line. After a month or two of such sliding it may move above the ‘falling wedge’.

Whatever option the Nifty chooses, the bulls won’t have too much to cheer in the near future. Q4 results declared so far continue to be a mixed bag. Keep an eye out for those few companies that are declaring better than expected results under these trying circumstances. They could be the winners in the next bull market.