There is an old proverb: Misfortunes never come singly. The Indian Rupee – already reeling from the burgeoning current account deficit due to imports far exceeding exports – was dealt a body blow by US Fed’s recent announcement of a possible slow down in its bonds buying programme (better known as QE3).
There was a global sell off in equity and bond markets, and India wasn’t spared. Was the reaction overdone? Apparently so. First, QE3 will be tapered down by the end of this year, not now. The availability of cheap money will continue for at least another 6 months. Second, the tapering down will depend on continued growth of the US economy – and there is every possibility that growth will be tepid at best.
That means the present correction may be providing a good opportunity to add fundamentally strong stocks at fair prices. The best way to make money in the stock market is to think and act differently from the herd.
BSE Sensex index chart
There is good reason for investors to feel bearish. FIIs have been selling for two straight weeks. Technically, the weekly bar of Sensex has closed below its 50 week EMA. Weekly technical indicators are turning bearish. MACD is positive, but has crossed below its signal line. ROC is also positive, but is falling towards its 10 week MA. RSI and Slow stochastic are below their 50% levels.
But bulls are not going to keel over and die. The concluding comment in last week’s analysis was: “Keep a close watch on the blue up trend line connecting the Jun ‘12 and Apr ‘13 bottoms – currently at 18660. A drop below may lead to a deeper correction.” Note that last week’s bar dropped below the up trend line (marked 2) intraweek, but closed above it.
The 18500 level (marked by blue dotted line) – corresponding to the previous top touched in Feb ‘13 – is likely to act as a support. Also, the longer-term up trend line (marked 1) connecting the Dec ‘11 and Jun ‘12 lows has not been tested.
A drop below 18500 may lead to a test of the up trend line (marked 1). A breach of this up trend line – currently at 17250 – may end the 18 months long bull phase. So, be cautious and keep proper stop-losses, but no need to panic.
NSE Nifty 50 index chart
The daily bar chart pattern of Nifty shows a break down below a ‘falling wedge’ pattern (usually a bullish pattern) followed by a ‘pullback’ to the lower edge of the wedge. Such a pullback offers a selling opportunity that was gleefully utilised by bears. Note that despite an intra-day breach of the blue uptrend line, the index closed on top of the line, giving temporary respite to bulls.
Daily technical indicators are bearish, and looking oversold. MACD is below its falling signal line, and hurtling down towards its oversold zone. ROC has moved up from its oversold zone and touching its falling 10 day MA. RSI and Slow stochastic are inside their oversold zones. Two of the four indicators – ROC and Slow stochastic – are showing positive divergences by touching higher bottoms while Nifty touched a lower bottom.
A continuation of last Friday’s bounce is possible. But the correction is expected to resume if FIIs continue their selling spree.
Bottomline? Chart patterns of BSE Sensex and NSE Nifty 50 indices are at import support levels after correcting from 2 year highs. Both indices should rise to new highs after the corrections are over. Use the dips to add to existing portfolios, but maintain suitable stop-losses. If FIIs continue to sell, the bull markets may be in jeopardy.
(PS: If you are thinking of using the correction to add good mid-cap/small-cap stocks to your portfolio, but are not sure which stocks to pick, book your subscriptions in advance to my Monthly Investment Newsletter. New subscriptions will be offered from July 1 ‘13.)
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