BS: From its October 2008 lows when the BSE Sensex touched 7,697 points, the markets have done a complete about turn. In the six months to March 2009, the markets were unable to sustain itself over the five figure mark.While the rise in global markets was the starting point,the run up to the election results and the period after that was a turning point.

A clear mandate for the UPA alliance and expectations that reforms would start rolling out saw the benchmark gain over 4,000 points since April. While the markets have seen huge swings post-elections, where will it be headed over the next six months or so? Given the optimism in the markets on reforms, focus on development projects and likely improvement in corporate earnings, would the bull run last?

Three technical analysts scan the charts and provide their rationale on what happened over the last one year, where the markets are headed and what you should do at this juncture. Read on to know more.

MOVING SIDEWAYS
Devangshu Datta

Where is the market likely to head in the next six months to a year? This question is difficult one primarily because there have been big trend reversals in the recent past. In succession, there’s been an extreme bull market, an extreme bear market, a period of consolidation and a revival.

In January 2008, the Nifty moved to an all-time high of 6,357 points. By end-January, it was sliding and by March 2008, it was down 20 per cent and in a confirmed bear market. By October, the index was testing support at 2,300, and down by around 65 per cent from its peak value.

Then there was a six-month period of consolidation when prices moved sideways. In March 2009, the market started moving up again, from around the 2,500 level. In early June, it unsuccessfully tested resistance at around 4,700 and went into another short-term correction that seems to have ended around a week ago.

The major trend seems to be bullish. Many signals back an optimistic view. Breadth in terms of advancing shares has been strong – most classes of stocks have participated in the rally. Volumes have been excellent and coincided with the revival in prices.

The confirmatory indicator of the 200 Day Moving Average (DMA) has been penetrated comfortably and chart patterns suggest that a further breakout has occurred after the 200 DMA barrier was crossed. Momentum indicators have been good. Daily volatility has been in the range of 100-150 points per day and it is likely to stay within that zone regardless of market direction.

The market has completed a bullish saucer pattern, with a flat bottom in the region of 2,550 (if we ignore one intra-day drop of 2,252 in October 2008) and a saucer-rim at around 3,900-4,000. Such a pattern projects to targets of between 5,000 and 5,300. Assuming that 5,300 is hit with further volume expansions, an inverted head-and-shoulders pattern will be completed and that would mean a target of around 7,500.

But that may take longer. In the time period of the next six months to a year, the optimists would expect the Nifty to move into the price range of 5,000-5,300. Of course, this means beating resistance at 4,693 (the 2009 high which came on June 12) and several bands beyond that.

This trend projection also naturally assumes that the major trend doesn’t either lose momentum or reverse. There will undoubtedly be intermediate corrections – the Nifty dropped from 4,693 (June 12) to 3,918 (July 13) for instance.

The pessimist would be wary of the following price-signal apart from the red flags of low breadth and low volume. The key support for the major trend is between 3,700 and 3,900. The 200-day exponential moving average is around 3,750 and the first Fibonacci retracement level of the March-June 2009 move is between 3,760 and 3,870 depending how it is calculated. The market must stay above 3,700 for the long-term bull-market to stay alive. If the Nifty does drop below 3,700, the chances are, it’s a new bear market.

It is also possible that the market will not beat resistance at 5,000 while staying above support at 3,900. In that case, it is likely to oscillate between 4,000 and 4,700. A look at option open interest patterns suggests that a lot of smart money is focussed in this zone.

Among subsidiary sector indices, the CNXIT and the Bank Nifty are likely to move in tandem with the Nifty but with exaggerated betas. The Bank Nifty in particular will outperform on the upside while losing more ground in every correction. Incidentally, both the NMCXIT and the Bank Nifty hit their respective lows in March 2009 rather than October 2008 which is when the Nifty bottomed. The Realty sector may lag the overall market – it has not yet confirmed a major trend reversal and is still hovering around its 200 DMA levels.

A different way to judge expectations is to look at the open interest (OI) in the Nifty options market’s long-term series. Considering the December 2009, March 2010 and June 2010 series, most call OI is at breakevens ranging between 4,600-4,700 with some OI between 5,000 and 5,200 as well. For the same expiries, the put OI is clustered between breakevens of 4,000-4,200 with another cluster at 3,650-3,900. This suggests that most long-term hedgers believe the trend will not reverse into a bear market but the bulk of the money is on sideways movements between 4,000 and 4,700.

The author is a technical analyst

BULLS HERE TO STAY
Vijay L Bhambwani

The tone and tenor of the markets has changed drastically from May 18, 2009. The markets were subtly changing gears at least seven weeks earlier and received a steroid shot after the election results were out. The Nifty managed to breach the 4,450 level that week but closed below that threshold. The reason why 4,450 is a critical level for the market is because this level proved to be a support for the Nifty in calendar year 2008 on two occasions. Once violated in June 2008, the markets fell rapidly and sharply. That event is still fresh in traders’ minds and is likely to remain so. Therefore, it is important that the Nifty spot remains above this make or break level of 4,450. If the criteria is fulfilled, the bulls have a mandate to buy further and the resultant bear squeeze is likely to push markets higher with some degree of acceleration.

This upmove needs to be watched keenly as the upthrust needs to be broadbased and the average ticket size per average trade needs to rally in tandem with the benchmark indices. Should there be any negative divergences, it would signal a chink in the bulls’ armour and the markets may witness a laboured upmove or even bouts of profit taking at higher levels. In case of declines, the immediate support will be seen at the 4,100 area and then at the 3,875-3,675 band. Downsides are likely to be cushioned by short covering and fresh buying emerging at lower levels. In the event of the 4,450 being overcome on a sustained closing basis, the hurdles on the upsides are likely to be seen at the 4,650-4,850 band. The closer the Nifty gets towards the 4,800 levels, the greater will be the overhead supply as faint hearted bulls exit from long positions that are either breaking even or the losses are at acceptable levels. I would cheer the markets without a shadow of doubt of a reversal (emergence of a new bull market) after the 4,850 hurdle is overcome and the Nifty starts keeping its head above this threshold. Volumes and open interest must rally in tandem with the prices and so must the average ticket size per trade as mentioned earlier.

In terms of leadership, the markets are likely to be led by the power, infrastructure, consumer staples, cyclicals and FMCG sectors. Technology stocks will continue to witness demand but will encounter some bouts of profit sales as US markets gyrate to economic data. For traders, the default choice will be Nifty futures but a basic asset allocation technique maybe incorporated here. On days that the Nifty 50 is rallying strongly and the Bank Nifty and CNX IT are rallying in tandem, allocate higher amounts to longs as the rally is secular and therefore more likely to sustain. On days, the Bank Nifty and CNX IT are lagging behind the Nifty 50, go long but cut back on the exposure limits.

In terms of correction, the price wise correction is over and done with. The time wise correction seems to indicate some more period of waiting as the markets are likely to witness a higher trajectory in the calendar year 2010. The rate of appreciation too is likely to be higher in 2010 as the participation levels are likely to get a fillip. The sum and substance of my view is to remain biased towards the long side and take a patient view of the markets.

A technical analyst, Vijay L Bhambwani is the author of A Trader’s Guide to Indian Commodity Markets

SHORT SENSEX LONG NIFTY
Mukul Pal

If short S&P 500, long Dow is absurd, what you are going to read below should be shocking. We will be taking you through pairs and performance cycles (a term coined by us) on the Indian capital markets. Performance cycles work because of time fractals. This is what we said in our annual India outlook 2009.

“Starting Aug 1992, Sensex has shown an average 40-month cycle. Three 40-month cycles make a decade cycle. The first decade cycle ended in 2002 and the second decade cycle should end somewhere around 2012. We are now in the last 3.3 year cycle up. Since the markets have erased most of the gains made since the decade up cycle started in September 2001, the expected bounce should be choppy and time consuming. We won’t be surprised if prices retest October lows or breach them marginally early Q2 2009. And this means selective stock picking and it is better to minimise market exposure by doing quantitative long short strategies. 13,000–15,000 is an achievable high for Sensex in 2009. BSE Metals was the worst performing sector of the year with returns of -72 per cent. We expect it to deliver better returns, at least for Q1 2009. We also expect BSE Oil to outperform Sensex over Q1 2009. Indian markets still lack instruments for doing advanced quantitative strategies. But long BSE 500-short Sensex also seems an attractive pair for Q1 2009. Don’t get too much into the negative mode despite all crisis and majority is foolish talk. Try looking top down.”

What happened? If you look at the twelve composite and sector indices (Nifty, Metals, Oil, Health, FMCG, Technology, Real Estate, Power, BSE 500, Capital Goods, Consumer Durables, Auto) a majority of them retested October lows and breached it marginally. Most of the market lows happened near 3-12 March window, 15 days before anticipated Q2 2009 started. We talked about a Sensex target of 13,000-15,000. Sensex hit a high of 15,600 on June 14. The top loser BSE Metals was a recommended sector not only fell marginally less than Sensex in the first quarter (December 31, 2008–March 2009 low), but was the top performer for the year (December 31 till date). Despite the oil crash, our recommended pair lost 2 per cent against Sensex. The BSE 500 vs. Sensex pair delivered 11 per cent from December 31. We clearly cautioned against too much negativity. Sensex was up 67 per cent for the year. We wrote about the tech reversal here on January 26. After a month CNXIT turned up from a low of 1,993 to 4,076 (up 105 per cent).

Coming back to pairs, the question which might surprise any conventional thought is that how did a notional pair long BSE 500, short Sensex work? 20 per cent annualised returns may not be very exciting for a leveraged forex trader but they can be significant for a mutual fund, especially if the returns come with lower risk. How could we know that the broad market could outperform the blue chips as early as the start of the year? Performance cycles are easy to spot and work with, if you believe time fractals and cycles work and exist. We can illustrate pair performance between Nifty, CNXIT, Bank Nifty, the few tradable Index futures and between stock futures of sector peers like RIL and ONGC.

Other interesting observations are that two respective periods saw shifting polarities, like classic performance cycles. The performers of the first period became underperformers of the other. The first period underperformers against Sensex viz. BSE Realty, BSE Consumer Goods, BSE Capital Goods became performers in the other period. While the first period performers till March against Sensex viz. BSE Oil, BSE FMCG, NIFTY, Healthcare shifted polarity and underperformed Sensex (post March). The best part is that some pairs delivered more than Sensex on an annualised basis. Sensex delivered 136 per cent from March lows, while BSE Metals – Sensex and BSE Real – Sensex pair delivered 145 per cent and 173 per cent respectively on annualised basis.

Apart from the investment strategy, studying pair performance cycles can also give many cues regarding market perspective. There is a limit to which BSE Metals can outperform the blue chip 30 stock index. If BSE Realty, BSE Metals, and BSE Capital Goods have already outperformed Sensex by 100 per cent, 90 per cent, 50 per cent respectively since March lows where do you think this outperformance can go? The outperformers of today will be the underperformers of tomorrow.

The BSE 500 outperformance has topped against Sensex and broad market underperformance against blue chips is not encouraging if you are just looking at the Sensex portfolio. We repeat the best of 2009 is nearly over and any upside from here should barely reach double digits (less than 10 per cent) for the 12 indices we discussed above. When you have 100 per cent annualised performances under your belt in half a year, you don’t haggle about the last 10 per cent. We will review if markets breach this 10 per cent push up from here.

Are pairs really that good? Are time fractals tradable? Are pairs really offering more returns for per unit of risk? Is risk really associated with price or time? These are a few questions you need to answer before you reach implementation stage and figure out how to make money buying Sensex against Nifty or vice versa.

The author is CEO, Orpheus CAPITALS, a global alternative research firm

With inputs of Vijay L Bhambwani & Mukul Pal

source: Business-Standard

Tags: bull market, bulls, market tips, nifty 5000 levels, NSE Tips, sensex at 20000

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