Technical View

December 06, 2010

Ride On …..
Despite skepticism about the recent recovery in the broader markets, the trend in Nifty and Sensex remains robust. The correction in mid caps and small caps were devastating which raises skepticism on the sustainability of the rally. But the underlying strength in Nifty and Sensex remains buoyant, which makes us believe that the key indices will regain control over its psychological barrier of 6,000 and 20,000 levels for the Nifty and Sensex respectively. Global markets move in tandem especially during downtrends but resilience in developed equities to act as a catalyst for sharp upmove in Nifty. It is generally observed that global markets move in tandem during downtrend and whenever major panics have occurred in developed markets, spillover e ects have been seen in the form of selling pressure in emerging markets. The resilience in the European and US markets despite war fears from North Korea rea rms positive trend in global markets. The subsequent correction in some of the Asian markets were more of consolidation rather trend reversal. Weakness in Dollar index and strength in Rupee reinstates positive trend in Nifty which is all set to rally beyond its all time high. The dollar index has retreated after hitting an intermediate peak of 81.52 after it failed to move beyond the 200DMA. The decline in the dollar index began with formation of ‘engul ng bear line’ on daily candlestick chart which is a bearish indication. This move is expected to retrace 62%, coinciding with descending trendline which earlier acted as breakout signal giving an immediate target of 77.4. Index composition of Nifty conducive for setting a record high with some of its components exhibiting enormous strength. With strength in IT and FMCG sector, the decline in Nifty has got arrested at 38.2% retracement while broader index like BSE 500 retraced nearly 50%. Hence the composition of Nifty and Sensex turned out to be better in assisting quick recovery and we feel that the stage is set for the key indices to surpass the January 2008 peak very soon. Following are stocks along with their expected returns that may contribute prominently for the Nifty and the Sensex to achieve levels of 6,462 and 21,775 levels (conservative projection) respectively.
Company Name ITC Ltd HDFC Ltd LT Ltd SBI Ltd RIL Ltd Infosys Ltd Expected Returns (%) 15.0 12.5 12.0 10.5 9.5 7.5

Applying Elliot wave principle on the Nifty suggests that the correction for wave (iv) of Minor degree is overdone and wave (v) of Intermediate degree 5 is in process to complete entire cycle of Primary degree. The correction, which began after hitting a peak of 6,284 levels from October 2010 has unfolded into ‘expanded at’ with combination of 3-3-5. This correction has failed to retrace beyond 38.2% of wave (iii) which corroborates strength. This may result in the rally, which began from the trough of wave (iv) surpassing the all-time high with ease. Based on conservative wave counts, we expect Nifty to test levels of 6,550, which is based on ‘wave equality’ principle. The expected wave count would be negated in case Nifty moves below 5,798 levels, which should be taken as a stop loss.

Penetration of Nifty back above its rising support line along with the appearance of ‘spring’ formation with ‘higher top’ and ‘higher bottom’ in previous week corroborates the uptrend. Two weeks earlier, Nifty violated the rising support line and closed below the same convincingly. This was construed as a major negative factor, which could have had implications of larger amplitude. However, last week, Nifty regained its control above the support, which has led to formation of ‘spring’ implying that a fresh rally is set to begin from hereon and head towards the resistance of the rising trendline.
Nifty weekly chart

Recommendation parameters for fundamental reports: Buy – Absolute return of over +10% Market Performer – Absolute return between -10% to +10% Sell – Absolute return below -10%
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Source: Metastock

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