Indian indices are charting a better course after being locked in a range for a couple of months. The Nifty has managed to rebound above the rising trend line, thus turning the breakdown below 5,560 a mere whipsaw. The healthy recovery from the trough of 5,549 caught short-sellers by surprise, with the Nifty breaking past its 52-week high in a matter of eight trading sessions.
On the long-term weekly chart, the Nifty confirmed a 'double bottom' breakout above 5,532 in September, and the neckline of the same provided solid cushion to the market. Had the recent correction extended below 5,530 levels for the week, it could have forced the Nifty back into a trading band of 5,100-5,500 but that was not to be. The Nifty corrected 4.5 per cent from the September peak in rupee terms and nearly 12 per cent in dollar terms, a healthy correction for overseas investors. Moreover, with no negative triggers from the Euro zone, the money waiting on the sidelines has resumed its journey to the Indian market.
Based on the amplitude of the 'double bottom' pattern, the upside projection on a conservative basis hints at a level of 6,400. However, the Nifty is most likely to face some resistance between 5,960 and 6,000 levels (i.e. 78.6 per cent retracement of the November 2010 peak to the October 2011 trough). This does not imply prices would reverse immediately but these prices could move in a sideways pattern, with mid-caps and small-caps remaining in the limelight.
The momentum indicator, especially relative strength index (RSI) on the weekly chart, has reversed from the bull market support zone of 55, coinciding with the earlier breakout line. RSI is heading back to its intermediate high and a move past 68 would ensure negation of the bearish divergence, which should provide more room for upside in the near term.
The immediate support for the Nifty is 5,625, which is a multiple support, based on a coincidence of the 50-daily moving average (DMA), as well as the rising trend line. In case of any adverse global event resulting in a close below this support line, the uptrend could get terminated and, thereafter, the Nifty could test the 200-DMA, which is placed at 5,335 levels. Hence, one should remain long on the market, with a stop-loss of 5,600 on a closing basis for a short-term target of 5,961 and a medium-term target of 6,400.
From a derivatives perspective, the Nifty rallied about three per cent from the previous expiry, followed by long rollover and a huge cash-based buying by foreign institutional investors. VIX usually trades in a range of -1 to +1 standard deviation and is currently at 15.5 (below -1 standard deviation) implying lesser nervousness. On the options front, huge put writing was seen in the 5,700 and 5,600 December series, implying these strikes would act as supports in the short term. Historically, December has been a positive month for the market, over the last decade. Let's hope the calendar year ends with a chart-buster hit and ushers a positive year.