Nifty mid-week update: bears defend 5400

The bulls seem to be facing a ‘last mile problem’ on the Nifty 50 chart – as the 5400 level is being well-defended by the bears. What is so great about the 5400 level? Quite a bit – if you are a regular follower of the technical analysis posts on this blog.

For starters, 5400 was a previous top in Apr ‘10 (and again in Oct ‘11). Previous tops have a tendency to act as support/resistance levels. In last Friday’s post, four technical definitions of a bull market were discussed. Two of them are of interest in the context of the 5400 level.

One, a 20% rise from the Dec ‘11 low of 4531 gives a level of 5437 – close enough to 5400. Two, a 50% Fibonacci retracement of the entire fall from the Nov ‘10 peak of 6338 to 4531 gives a level of 5434. To satisfy the technical definition of a bull market, the Nifty has to close above these two levels.

There is another point of technical interest mentioned in last Sunday’s post. Note the blue down trend line that dominated the Nifty chart for the past 15 months, and got breached on the upside during the recent rally. An upward breach of any resistance level is technically valid provided it closes at least 3% above the point of breach.

The down trend line was breached on Feb 1 ‘12, and the point of breach came at about 5220. A 3% higher close means a level of about 5370. In technical analysis, exact levels are not important. Approximately, 5370 is close enough to 5400.

Despite an intra-day breach of 5400 on Feb 7 ‘12, the Nifty has so far failed to close above 5370. Obviously, the bears understand and follow technical analysis and are putting up a fight to defend the 5400 level.

Who will win the battle? Will the bulls propel the Nifty above 5400 soon, or will the bears push the Nifty back into its down trend? What do readers think?

Are the Sensex and Nifty back in bull markets?

Relentless buying by the FIIs have changed stock market sentiments from extremely negative to almost celebratorily positive. Have the Sensex and Nifty returned to bull markets? Is it time to change strategy from ‘selling the rallies’ to ‘buying the dips’?

Technically, there are four criteria that define a bull market. They are:

1. A 20% rise from the bottom.

For the Sensex, the recent bottom was 15136 (touched on Dec 20 ‘11). A 20% rise means a level of 18163. Still a little more than 500 points to get there. For the Nifty, the recent bottom was 4531 (also touched on Dec 20 ‘11). A 20% rise means a level of 5437. A bit more than 100 points away.

2. Index (or stock) trading above its 200 day EMA.

Both Sensex and Nifty are trading above their 200 day EMAs – so this definition has been met.

3. The ‘golden cross’ of the 50 day EMA above the 200 day EMA.

The 50 day EMA of the Sensex is rising, but is still 500 points below its 200 day EMA. The 50 day EMA of the Nifty is also rising but is more than 150 points below the 200 day EMA.

4. Index (or stock) retracing more than 50% of its fall.

The Sensex peaked at 21109 on Nov 5 ‘10, and dropped 5973 points to its low of 15136. A 50% retracement of the entire fall would mean a level of 18122 – almost 500 points away from today’s intra-day high. The Nifty hit a high of 6338 on Nov 5 ‘10, and dropped 1807 points to its low of 4531. A 50% retracement of the entire fall would take the index to 5434 – still about 100 points further than today’s intra-day high. (Now you know why technical experts are talking about the 5400 level.)

Only one (2 above) out of the four criteria that define a bull market has been met so far. Does that mean that both indices haven’t entered a bull market yet? Technically, the answer is in the affirmative. Ideally, meeting three out of the four criteria should leave no doubt that the bulls are on top. For that to happen, another 500 points on the Sensex and 100 points on the Nifty are left to cover. The way the FIIs are buying, that could happen in the very near future.

Related post

Are we in a Bear Market or a Bull Market?

About Nifty Fibonacci retracement levels

During the previous bear market in 2008, I had written a post: ‘How low can the Sensex go?’, where the concept of Fibonacci retracement levels was introduced. Now that the Indian stock market has entered a bear phase once more, it may be a good time to revisit Fibonacci levels to get an idea of how low the Nifty may fall.

The assumption here is that the entire bull rally – from the closing low of 2573 on Mar 9 ‘09 to the closing high of 6312 on Nov 5 ‘10 – is being ‘corrected’. The Nifty had an up move of (6312 – 2573 =) 3739 points, which can be rounded-off to 3740 points.

The respective Fibonacci retracements are:

1. 38.2% of 3740 = 1428 points
2. 50% of 3740    = 1870 points
3. 61.8% of 3740 = 2311 points

So, the retracement levels are:

1. 6312 – 1428 = 4884; say, 4900
2. 6312 – 1870 = 4442; say, 4450
3. 6312 – 2311 = 4001; say, 4000

These levels have been marked on the Nifty closing chart below:

How sacrosanct are these Fibonacci retracement levels? No level is sacrosanct where the market is concerned. It can go anywhere and stop anywhere. But after studying hundreds of charts over many many years, the gurus of technical analysis discovered that markets tend to turn around near Fibonacci retracement levels – both in bull and bear markets.

So, how far down will the Nifty go? The 38.2% retracement level is where we are at now. Can it bounce up from here? Looking at the state of the global and Indian economies, and the weakness in the Nifty technical indicators, the answer is ‘no’.

The next likely support is near the 50% retracement level of about 4450. If that is broken, then the Nifty may go down to the 61.8% retracement level of 4000. Interestingly, 4000 is not only the downward target from the break out below the large descending triangle on the Nifty chart, it is also the top of the huge gap formed on the chart in May ‘09 (not visible in the closing chart). Such ‘coincidences’ make technical analysis a lot of fun.

Can the Nifty fall below 4000 to close the gap? Very unlikely, but not impossible. In Oct ‘08, the Sensex dropped to 7700, which was well below the 61.8% retracement level of 9900. What is the likely level where the Nifty may find support?

Note that the Fibonacci retracement levels are just some numbers calculated on the basis of empirical observations. More realistic support levels are at or near previous tops. The Jun ‘09 and Aug ‘09 tops occurred near 4700. The top on May 18 ‘09 was 4323 and that on Jul 3 ‘09 was 4424 (very close to the 50% retracement level). So, we can expect the Nifty to turn around from the zone between 4300 and 4700.

What should small investors do? Avoid buying or selling in a panic. If you didn’t book profit at 6300 or 5900, don’t start selling now. If you are planning to invest in an index fund or Nifty BeES, start accumulating below 4700. As far as individual stocks are concerned, carry out this same exercise on their respective charts to decide on entry points.