A lot has changed since I wrote my previous article in early August. The market, at that time, was struggling to break out above 5,400-5,450 and was constantly getting pulled back. The breadth on every rally was extremely poor and the banking sector (which forms close to 25 per cent of the Index) was displaying considerable weakness. The markets finally gave a breakout above this crucial resistance in September, which led to a change in our medium-term outlook, to positive.
With many a pullback rally over the last 12-18 months, the one from the June 2012 lows can now be considered the first move up of an uptrend. Since then, the market has been forming higher tops and higher bottoms, a classical bull market sign. Many heavyweights in the index, such as ICICI Bank and Larsen and Toubro, also have given similar breakouts. The strong uptrend in stocks like HDFC and HDFC Bank has helped propel the rally further. The breakout in the Nifty was on good volumes and confirmed by the momentum oscillators as well i.e., the relative strength index (RSI) broke the high made during the February rally and also closed above the resistance level of 60, confirming a medium-term uptrend.
The move above 5,450 has had broad participation across sectors, including banking, especially public sector undertaking banks which have had a smart run from heavily oversold levels, automobile, cement and capital goods. We have witnessed some underperformance from the defensive space, especially fast-moving consumer goods stocks. Pharmaceutical stocks still seem in a secular trend, where every correction can be bought into.
After this sharp upmove in September, the markets have been trading in a sideways range for over a month, which can be characterised as a classic consolidation phase, leading to the market forming a higher base in the event of any subsequent decline. Volumes too, have reduced in this consolidation phase, adding further evidence to our hypothesis.
As shown in the chart, the trendline connecting all the recent lows lies in the range of 5,550-5,560. This coincides with the RSI nearing the 40-level, which has acted as a support in all the corrections since July.
In the recent correction, the market has taken support in the region of 5,550, a positive sign. From a short-term perspective, the 5,550-mark is a crucial level for traders to watch. On the upside, once we breach the 5,650-mark, we can expect the market to regain momentum and head towards the previous highs.
The global markets have had a far steeper correction in the past month and are now pulling back from oversold levels, which has helped the market hold on to crucial support levels. In case of any further sell-off in the global markets and breach of short-term support of the Nifty (5,550), we can expect the index to find very strong support around 5,400-5,450, which should act as a pivot.
The medium-term trend of the market remains up and any decline to 5,450 should be used as a buying opportunity.