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The devoted stock picker is happier when the market drops 300 points than when it rises the same amount.—Peter Lynch
The above quote of Peter Lynch well summarises the need for correction in a rising bull market and the opportunity it provides to investors when others are fearful. Trend following with active money management is one of the most objective ways of trading the market. As clichéd as it may sound, the old adage of “a trend is your friend” remains one of the most time-tested trading rules in the markets.
The primary trend in the Nifty had turned bullish after a long corrective and sideways trend prevailing last year. The rally at the beginning of the year had set the foundation on which the equity market launched itself in the month of September 2012. The Nifty has given more than 18 per cent returns in the last five months considering the advance from the June 2012 low of 4,770. In the process, the Nifty touched its 52-week high of 5,815. The advance has featured the formation of higher peaks and troughs, which is the typical characterstic of a bull market. It is also interesting to note that the Nifty is now moving up in a rising trend channel on the weekly charts and is respecting support levels clearly. Weekly moving average convergence divergence (MACD) has remained in bullish mode since February 2012. This clearly sets up the premise that we are indeed in a bull market.
Keeping things simple, one needs to follow ‘bull market rules’ to trade in this market. In a bull market, oversold conditions are seen as a buying opportunity. An overbought market is not usually a cause for concern, because corrections from these conditions are often small, and sometimes the market will continue to rally, while the overbought conditions are relieved internally via time correction or sideways movement.
Just like any cycle of growth and decay, the bull market is often a series of advances with occassional corrections leading to a net advance. The exuberance of the last few months’ rally has created room for a corrective move. The February 2012 high of 5,630 is the nearest support for the Nifty. Below this, the rising window (5,447- 5,526) created in September is a good support. Interestingly, this gap area is also at the rising channel support discussed above and near the 50 simple moving average (SMA) support of 5,531.
The current market correction is likely to be an opportunity for investors to build up positions to ride the trend. With the uptrend firmly in place, the corrective price action is likely to be shallow. Dips till 5,550 should be bought into for an upside price objective of 5,950 or higher in the next two months. In the short term, Nifty could rise to 5,800. The sectors, which are leading the current rally are banking and financials, infrastructure and capital goods. Effectively, the rate sensitives have taken the lead in this rally, while pharma and fast-moving consumer goods seem to be moving into a consolidation mode.
The author is head-technical research, Edelweiss Securities