Mumbai: The classic diamond formation was formed on the Nifty in July, 2018. The breakout from this took the Nifty to a new lifetime high - gaining about 1,100 points. A similar formation has again been witnessed and a breakout is in the process of being triggered in January, 2019.
Further, over the last few weeks, one has been witnessing the penchant of investors and traders to short every rally.
The breakout could be very sharp and could lead to the previous top being reached or in extreme cases, of being breached as well. The Nifty top was 11,760.20 points and the level as of January 15 was 10,886.80 points. This would imply that the ensuing rally has legs to gain as much as 850 points or thereabout.
According to Srikant Chouhan, Senior Vice President, Technical Research, Kotak Securities, the diamond formation has been formed on the basis of newsflows which suggests high uncertainty.
One of the key factors for the technical formation to give a boost to the market will be the build-up to the largest electoral process in the world -- India's 2019 General Elections.
Besides this, low valuations, a healthy macro-economic environment and stable demand will help attract foreign and domestic investors.
As per technical analysts, the NSE Nifty50 has made a 'Diamond' and a 'Symmetrical Triangle' pattern on a daily time scale.
However, some technical analysts have taken a contradictory view on the 'Diamond' formation. But all of them agree with the view that the market holds potential for a further upside.
"It can be primarily attributed to political uncertainty, trade war, and a volatile oil market," Chouhan told IANS, adding that the if BJP returns to power then the market will surely rise.
"Other data that is in the public domain is already factored in...most investors are highly certain that the RBI will go for a rate cut. Among other factors is the performance of the PSU Banks, struggling with bad debts. We expect that they will show better reports than expected."
Centrum Broking's Technical and Derivatives Analyst Jay Purohit said the Nifty has made a short-term base in the zone of 10,650-10,700 points and had given a breakout from 'Diamond' as well as 'Symmetrical Triangle' pattern on daily time scale.
The breakout was led by decent volumes and fresh long build-up in Nifty Futures on Tuesday.
"But follow-up buying, after the breakout, was missing in yesterday's session, which is a sign of concern. However, overall data indicates the possibility of an upmove towards 11,050-11,100 in the coming few days," Purohit said.
HDFC Securities' Deepak Jasani said the Nifty had broken out of a triangle formation on January 15, 2019. This formation was in force since mid-Dec 2018.
"Some people interpret the formation since mid-November 2018 as a 'Diamond' formation. However, a diamond formation is formed at the top or bottom and is a reversal pattern on most occasions," Jasani told IANS.
"If the Diamond pattern is right, then the Nifty has the potential to rise to 11,560 points (the height of Diamond drawn from the breakout point). In case the Symmetrical triangle formation is correct then the Nifty could rise to 11,300. Symmetrical triangle is a continuation pattern on most occasions."
As far as the foreign investors are concerned, Sagar Doshi, Head Technical Analyst, Edelweiss Investment Research, said that FIIs have a high chance of returning to the market this next year.
"The year 2018 saw an outflow of $4 billion; historically we have seen outflows in a year and the next year tends to have higher inflows over and above the previous year's outflows," Doshi said.
"Emerging markets valuations are near their 10 year lows. India being the most preferred amongst it's peers could see strong foreign inflows in the coming year once the election frenzy period is over."
The Indian stock market indices have done well over the past few days due to mild positive inflows, buying in anticipation of positive announcements being made in the interim budget and a long overdue bounce in small and midcaps after severe underpeformance over the past few months.
On Wednesday, broadly negative global cues, especially owing to the political uncertainty in the UK on Brexit and a weak rupee, subdued the Indian equity market with both major indices -- Sensex and Nifty50 -- ending flat.
Consequently, the NSE Nifty50 gained a meagre 3.50 points or 0.03 per cent to settle at 10,890.30.
The BSE Sensex closed higher 2.96 points or 0.01 per cent at 36,321.29, from the previous close of 36,318.33 points.