Nifty: Are Bulls being taken on by their horns?

aaaadvisory — Sun, 30 Jan 2011 20:40:36 +0000

Nifty: Are the bulls being taken on by their horns?

•Since Diwali 2010, Indian markets have been under pressure and Nifty hasn’t managed to sustain above 6300 levels.

•The first decline from the peak of 6347 on Nov 09, 2010 can be labeled as profit taking.

•The failure thereafter to sustain above 6200 by Nifty in the past 21/2 months is what bothering.

•For the first time since Nifty started to rally in March-2009, one is observing a “Lower Top”.

•The upward momentum which began in Sep – 2010 around 5350 levels in Nifty is on verge of getting retraced by 100%.

•The questions we face today are:

–Is the rally over in Nifty?

–Will year 2011 generate a positive return for Nifty?

–How much will the Nifty correct?

–Is the uptrend intact?

–Should be initiate longs at lower levels?

•In the subsequent slides, we try to seek answers to these questions by taking a look at some facts and figures, some charts and statistics.

These facts and figures would help us to a certain extent in determining a reasonable explanation for the current scenario and perhaps help in building a case for the future.

Nifty: Some introspection

•The failure to break past 6350 by Nifty futures for the second time in two years is being seen as a possible “Double Top” by some.

•The decline from the highs of 6200 in Jan 2011 to date has been on higher volumes is another cause of concern.

•Lack of leadership within the Nifty-50 stocks and too much expectation from the automobile and banking stocks in Nifty to perform / outperform each time a hassle.

•Insufficient support from heavy weights like RIL ,ONGC and NTPC continues to be a worry.

•Erratic price action behavior by Capital Goods, Oil & Gas and Metal stocks in Nifty keeping both investors and traders at bay.

•Lack of confidence in sectors such as Healthcare and FMCG amongst participants as they continue to be perceived as “Defensive bets”.

•Poor show by Real Estate and select Power stocks in Nifty adds up to woes.

•Low readings by Nifty’s Implied Volatility making life riskier for professional option traders.

•Does the immediate levels of support around 5350 areas has the potential rein in the decline?

•What if Nifty breaks below 5350 levels even if the same happens somewhere in the month of March 2011?

Nifty: Straight from the Charts

•The 14 Day RSI is close to the 30 levels which in the past 15 months has proven to be a graveyard for bears i.e. Nifty has managed not only to pullback but also made a new swing high.

•The short term price action suggests that the Nifty futures is in the oversold territory.

•We expect a short term swing low / bottom to be in place around Tuesday in the current week.

•The range in which the swing low / bottom can be formed is expected to be between 5300-5400 areas.

•A meaningful pullback is what we would be expecting in Nifty from the support zones mentioned from Tuesday and ideally we would expect the pullback to last anywhere between 5-8 trading sessions.

•We expect the pullback to push prices of Nifty futures to near 5800 levels.

•The 21 month long term up trend in Nifty is still intact and there is no concrete evidence of trend reversal as yet.

•The current decline in Nifty futures can at best be described as signal of caution.

•Pullbacks in Nifty can be used to unwind Automobile, Banking and Capital Goods stocks in Nifty-50 as we don’t expect leadership from these sectors anymore.

Due Dilligence with Technical Analysis

Nifty: Are Bulls being taken on by their horns?