It's easy to make purely technical predictions about market direction in early 2013. The market is bullish. On January 2, the major indices hit new 52-week highs. Since June 2012, the Nifty has been in a strong uptrend.
Starting from 4,800 levels, the index has moved till 6,000 with a succession of rising peaks.
Every trend-following indicator is signalling "buy". There is no way to set upside targets. This uptrend could last for months or end in weeks. It could accelerate, it could decelerate. The experienced trader will set trailing stop losses and go long, to ride the trend until its peak.
We can mark specific support and resistance points, which are worth watching for signs of trend reversal, or acceleration. We can also suggest some data, which are worth tracking. It is necessary to sound a note of caution also.
Technical analysis works best when information is publicly available to a large number of players. This market has very asymmetric information-flow. Much key information isn't publicly available.
Policy decisions by various governments, various central banks and also conflict resolution or escalation in resource-rich zones like West Asia and North Africa are unknowns and difficult, or impossible to diagnose, from price history. This means high volatility and high chances of rapid, deep moves.
If the market is bullish, by definition, it must make new highs. The Nifty will face resistance in every 50-point zone, until and unless it crosses the previous record levels at 6,350. If it breaks out into new territory above 6,350 and consolidates above 6,350, it could run up by another 1,000 points in the next six months.
On the downside, "rigid" support levels to watch are the 100-point ranges of 5,750-5,850 and 5,550-5,650. If the index drops below 5,750, it will be in an intermediate downtrend. If it drops below the next support at 5,550, it could head into long-term bearishness.
In terms of dynamic indicators, long-term moving averages are the best guides in trending markets. The key test of the bull market is to stay above the 200-day moving average (200 DMA), which is now at 5,400. A drop below the 200 DMA will suggest a new bear-market.
In theory, there may be a 500-600 point correction even if the market retains overall bullish flavour. In practice, a 10 per cent move in a month occurs once to twice a year. So, a sudden, sharp correction is possible. Of course, a sharp upmove is even more likely if momentum is positive.
An intermediate trader may follow the 55-DMA, which indicates the three-month trend. A short-term trader would follow the 20 DMA or 10 DMA. As the graph shows, the market is well above its own 55 DMA and 200 DMA. It is also above its 20 DMA and 10 DMA, (both close to 5,900).
The other indicators to watch include domestic interest rates and institutional - domestic (DII) and foreign (FII) - attitude, and political instability. Interest rate cuts are expected. The trend may stumble if the RBI doesn't comply. T-Bill yields should fall if there are rate cuts.
DII attitude to equity has been net negative through 2012, while FII attitude has been very positive. Ideally, DII attitude would go positive. It is vital that FIIs remain not only net positive, but also maintain their buying quanta. They bought a net $23 billion in 2012 – that would need to be matched in 2013 to push up prices further.