Headed for better times

Last Updated: Sun, Jun 24, 2012 19:52 hrs

We find technicals on the Nifty constructive (positive) from a short to medium-term perspective. The recent phase of multi-week decline since the February peak of over 5,600 was a correction in a broader uptrend that started with the December 2011-February 2012 upmove, which saw the Nifty move up from 4,550 to 5,600 levels.

This decline, since the February peak of over 5,600, has had three defining characteristics. First, volumes have been distinctly lower than the preceding run-up of the December-February period. Second, good buying support has emerged near the 4,800 level, which happens to be the 76.4 per cent retracement of the entire upmove of the December-February period. Third and perhaps the most important, front pages of newspapers have spelt gloom and the fundamental situation has seemed to worsen.

All of these, to us, appear to be characteristics of wave two of a five-wave Elliot advance. According to Elliot, a motive advance unfolds in five different waves of which the first, the third and the fifth are in the direction of the primary trend while the second and the fourth waves are corrective and hence, run counter to the primary trend.

In simple terms, the upmove that had started in December 2011 off the Nifty lows of 4,550 was the beginning of a fresh uptrend. The decline that we recently saw was just a correction of that uptrend and the next leg up should take us at least beyond the February peak of 5,600 or thereabouts. That news and fundamentals have been adverse is normal, by Elliot’s suggestion. This is typically the case during waves one and two of a fresh uptrend. One can explain this by thinking of markets as being forward-looking and hence, moving higher before news actually starts turning favourable.

Other technical indicators point to a similar picture. Massive build-up of positions across put strikes suggests market participants have heavily bought insurance expecting downsides. This, from a contrarian perspective, is a positive. Rise in the relative strength of Nifty over key global equity indices is yet another positive.

The Nifty also finds itself above the trendline that had defined the ‘lower highs’ formations since the February peak, indicating the downward consolidation phase is behind us (refer to the bold black trendline in the chart below).

From a slightly longer term view, the Nifty has moved higher from the channel that it had moved in during the bearish period of November-December 2011 (refer to the dotted parallel lines in the chart). This is yet another indication we are out of the woods and headed for better times.

To sum up, we are positive on the prospects of the Indian markets, going forward. Downsides should be limited and should provide attractive entry points into this market.

The author heads derivatives research at Ambit Capital

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