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The prognosis: The bull is here to stay

Is the prediction of a bullish market merely speculation? Not so, proves the technical analysis of the market.

Rakesh Bansal        Print Edition: April, 2010

Any fall in the stock markets is a golden opportunity for investors to buy stocks. The Indian market is on a spurt as the budget has given strong signals for sustaining economic growth. With time, the positive momentum can take the markets to higher levels. The Nifty, India's benchmark index, seems to have found a strong base around 4,500 and technical indicators signal a positive long-term uptrend from this level.

The market was expecting a word on the goods and services tax (GST) and Direct Taxes Code in the budget, which was fulfilled. If the GST is implemented and global markets are supportive, then the Nifty has the potential to reach the 7,000 mark in one year. Technically, I don't see the Nifty going below 4,500 levels. Even if it breaches this level, it will be for the short term. This means a great opportunity for long-term investors to put their money in equities.

Earlier, the Nifty was moving in a band of 4,000-5,000, which was crossed due to the market momentum. Thereafter, the market corrected and now the band has shifted upwards. The new range for the Nifty seems to be 4,800-5,300. There is an 80 per cent probability that the Nifty will breach 5,300 levels. If it does, a new band of 4,800-5,500 will come into force. Similarly, the upper limit of this band might move higher over time.

From the perspective of technical charts, the Nifty had corrected from the highs of 6,350 to 2,250 in a short span of one year. Now, it is trading above 61.8 per cent Fibonacci Retracement (FR) of 4,800. FR is a popular tool used by technical analysts to predict whether the market will retrace its original move and find support at certain levels. It is a rule of FR that when the market retraces by more than 61.8 per cent, its direction reverses. About 50 per cent FR of this downward move is the level of 4,350. This is why the market should find a good support between 4,350 and 4,800. While the FR identifies 4,500 as a good support level for the Nifty, the moving average convergence divergence (MACD) is also pointing at a clear bullish trend. The MACD is another widely used technical indicator. It is the difference between an instrument's 26-day and 12-day exponential moving average (EMA) of an index or share price. It responds to the speed of price movement and most investors use this indicator to gauge the strength of the price move.

A bullish MACD moves above its 9-day EMA (which is called a signal line). Bullish moving average crossovers are probably the most common signals to gauge the direction of the markets. A 9-period dotted exponential moving average is automatically displayed on top of the MACD indicator line. The basic MACD trading rule is to sell when the MACD falls below its 9-period signal line. Similarly, the buy signal occurs when the MACD rises above its signal line.

The Nifty is making higher highs and higher bottoms, which suggests a secular bull market. This is the best indicator of where the market is headed. Secondly, MACD on weekly charts is above zero, which is considered very bullish. Around the 4,500 level, the MACD line curves to kiss the signal line—an indication of strong support. This means the markets will go up.

My bets for an investment horizon of 2-3 years are the infrastructure and banking sectors. Nobody knows which sector will boom, but banks will participate in the growth and will be indirect beneficiaries.

The bottom line: The Nifty is unlikely to fall below the 4,500 level. If reforms like GST are implemented on schedule, it could cross 7,000. All this augurs well for the long-term investor.

Technical Analysis vs Fundamental Analysis

Data

Technical Analysis: Looks at the past price movements and trading patterns of a security to determine its future course.

Fundamental Analysis: Examines the firm's financials, business model, profit growth and prospects to know its future DATA price.

Assumptions

Technical Analysis: Assumes that the stock price will move along an established trend and pattern as it has done in the past.

Fundamental Analysis: Assumes that the stock price is determined by its intrinsic value and the future earning potential of the company.

Investments

Technical Analysis: Can be used for any tradeable financial security— equity shares, commodities, forex, futures, bonds.

Fundamental Analysis: Can be used only for a narrow range of instruments such as shares, stock indices and commodities.

Tenure

Technical Analysis: The scope of the analysis can range from very short (daily or weekly) to mid-term (monthly or quarterly).

Fundamental Analysis: Typically takes a long-term perspective of at least one-two years while evaluating a security.

Investor Type

Technical Analysis: Useful if you are a day trader, short-term investor or a hedger looking for quick gains from stocks.

Fundamental Analysis: Useful for investors who want to create wealth over the long-term by buying and holding securities.

Information Flow

Technical Analysis: Restricted to those who are conversant with the concept and have access to the required valuation tools.

Fundamental Analysis: Available to all investors through company's annual reports, stock exchange Websites, brokerages, etc.

- Rakesh Bansal is CEO and Fund Manager, New Age Wealth Management.

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