More upside for markets, rupee

Last Updated: Sun, Sep 16, 2012 19:54 hrs

The Federal Reserve’s plan to launch another round of quantitative easing to support the slowing economy brought optimism on Wall Street. On Thursday, the US markets finished at multi-year highs. The next day Asian, Indian and European markets, too, rallied and applauded the third round of quantitative easing.

Back home, the Nifty ended the week on a positive note with a climber. It tells us buyers were in control during the entire week. In market-profile terms, this was a week of trend reversal.

For the last 13 weeks, the Nifty was trading with a range of 250-300 points and its weighted average was at 5,300-odd level. The index was struggling to breach that range. But it now appears to have broken out. The index is up four per cent in the past week from 5,358 to 5,577, and recently put in a fresh six-month high.

Now, all eyes will be on the major event locally — the policy meet of the Reserve Bank of India that is scheduled for Monday. But the way the Nifty has started a new intermediate degree uptrend after finding support at the 40-week MA (moving average); we feel the event will not turn out to be a wet blanket. The other reason why we feel so is because the Bank Nifty, which is most likely to get influenced by the policy meet, has upturned in a classic way after finding support at the 40-week MA, whose gradient is positive. From the technical analysis perspective, I believe the current price fully reflects all information and when the price itself is saying that northward flight is going to continue, I don’t feel the event will spoil the party.

Also, a few frontline stocks like Reliance, L&T, TCS, SBI and Tata Motors have modified their intermediate degree trend from down to up, which gives us the feel that buying is across-the-board. The divorce of the Nifty and 40-week MA is good. It indicates that a new uptrend that is in its adolescent stage is gaining strength and there is still a long way to go.

The best part is the golden cross of 50-day and 200-day MA, which took place on July 30, after which the Nifty never came to that low of 5,032. We are highlighting this because that was a major shift in the overall trend from down to up. With a series of rising troughs in place, we feel the high of 5,630 is likely in the coming week itself. Also, the daily KST has recently reversed and turned bullish, which means the next northward cycle has begun. In this event, one should not expect the market to halt at the barrier of 5,630. A small bout of profit booking can come in but overall, the current uptrend will remain intact. Further, Friday’s breakdown in the rupee has given a support in the form of a prop to our bullish view on equities. In fact, it has increased our conviction for a parabolic move in equities. We expect rupee to appreciate further against the dollar and go back to the 53-level which is the value of the 200-day MA.

The monstrous rally we saw on Friday has all the characteristics of a wave-three advance. Prices rise quickly, corrections are short-lived and shallow. The index has started walking up the upper Bollinger band. Psychologically when wave three starts, the news is probably still bearish and most market players remain negative; but by wave three’s midpoint, “the crowd” will often join the new bullish trend. Our preferred alternate after the Nifty going over the upper boundary of the line drawn connecting the highs of 5,348 and 5,448 is that we are in a minor degree wave.

The author is Business Head, Institutional Equities, Emkay Global Financial Services Ltd

More from Sify: