An medium term outlook on Nifty

1. Nifty Resonance
Monday, January 31, 2011
An Index Analysis Report

2. Nifty: Are the bulls being taken on by their horns?
• Since Diwali 2010, Indian markets have been under pressure and Nifty hasn’t
managed to sustain above 6300 levels.
• The first decline from the peak of 6347 on Nov 09, 2010 can be labeled as profit
taking.
• The failure thereafter to sustain above 6200 by Nifty in the past 21/2 months is what
bothering.
• For the first time since Nifty started to rally in March-2009, one is observing a
“Lower Top”.
• The upward momentum which began in Sep – 2010 around 5350 levels in Nifty is on
verge of getting retraced by 100%.
• The questions we face today are:
– Is the rally over in Nifty?
– Will year 2011 generate a positive return for Nifty?
– How much will the Nifty correct?
– Is the uptrend intact?
– Should be initiate longs at lower levels?
• In the subsequent slides, we try to seek answers to these questions by taking a look
at some facts and figures, some charts and statistics.
• These facts and figures would help us to a certain extent in determining a reasonable
explanation for the current scenario and perhaps help in building a case for the
future.
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3. Nifty: Some introspection
• The failure to break past 6350 by Nifty futures for the second time in two years is
being seen as a possible “Double Top” by some.
• The decline from the highs of 6200 in Jan 2011 to date has been on higher volumes
is another cause of concern.
• Lack of leadership within the Nifty-50 stocks and too much expectation from the
automobile and banking stocks in Nifty to perform / outperform each time a hassle.
• Insufficient support from heavy weights like RIL ,ONGC and NTPC continues to be a
worry.
• Erratic price action behavior by Capital Goods, Oil & Gas and Metal stocks in Nifty
keeping both investors and traders at bay.
• Lack of confidence in sectors such as Healthcare and FMCG amongst participants as
they continue to be perceived as “Defensive bets”.
• Poor show by Real Estate and select Power stocks in Nifty adds up to woes.
• Low readings by Nifty’s Implied Volatility making life riskier for professional option
traders.
• Does the immediate levels of support around 5350 areas has the potential rein in the
decline?
• What if Nifty breaks below 5350 levels even if the same happens somewhere in the
month of March 2011?
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4. Nifty Futures (Daily) CMP:5536.55
Trend line connecting lows
of July 2009 (4375) and
May 2010 (7102).
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5. Nifty Futures 14 Day RSI (Daily) Level:31.51
In the past, we can see, the levels near 30 of RSI has indicated oversold status for Nifty
and a bounce back has occurred. Will it happen again is the question here?
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6. Nifty Futures (Daily): Stochastic Momentum Index: Level: 73.58
The Long term upward
momentum is waning and
the same is slowly being
confirmed by the Stochastic
Momentum Index Charts.
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7. Nifty: Straight from the Charts
• The 14 Day RSI is close to the 30 levels which in the past 15 months has proven to
be a graveyard for bears i.e. Nifty has managed not only to pullback but also made a
new swing high.
• The short term price action suggests that the Nifty futures is in the oversold territory.
• We expect a short term swing low / bottom to be in place around Tuesday in the
current week.
• The range in which the swing low / bottom can be formed is expected to be between
5300-5400 areas.
• A meaningful pullback is what we would be expecting in Nifty from the support zones
mentioned from Tuesday and ideally we would expect the pullback to last anywhere
between 5-8 trading sessions.
• We expect the pullback to push prices of Nifty futures to near 5800 levels.
• The 21 month long term up trend in Nifty is still intact and there is no concrete
evidence of trend reversal as yet.
• The current decline in Nifty futures can at best be described as signal of caution.
• Pullbacks in Nifty can be used to unwind Automobile, Banking and Capital Goods
stocks in Nifty-50 as we don’t expect leadership from these sectors anymore.
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