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Every Upward Rally does not equal a bull market

April 11, 2009

Be nimble footed enough to actively stay in lookout and utilize one of those violent bear market up rallies. It might help you to cut your losses, realign your sails and reassess your options.

Surviving Shocks and Crisis, Layoff Tracker, Jan 31 2009

Asian stocks should see a good recovery by 09Q2.

2009: What to Expect and what not to Expect, Seeking Alpha, Jan 01,2009

Indian markets are at a crucial juncture. Cynics of this move are dying a cold death everyday, with 50 share index, NIFTY inching higher each session. At present, NIFTY is at a 5 month high, presently trading at 3360-3400 levels. There were quite a few stocks which could have been used even in this secular bear market, to numb the losses of so called “long term investors”. But is it a time to jump in? Is it a buy? Charts please!

2 Years NIFTY: A Slight Bullish Take

This is chart of NIFTY ranging past two years. Contains last phases of a bull market and a bear market. The green curve thin line, is a 50 day rolling average. It in a nutshell shows the 50 day average consensus of the price series. The blue thin line is the 20 day rolling average. The yellow trendline is the primary trend line from the bull market top of Jan 08, to present.

Interesting to note, is the current rally of NIFTY from the March lows of 2500 [this bear market low is ~2250], it has surged 36% and breached the long term trendline quite strongly. The breach occurred at circa 3150[incidentally Jan 09 highs] and NIFTY is still going strong, and neatly chugging away. And this is indeed a positive sign. We had such a breach in September 08, but the rally was lethargic and lacked any “zing” to it. It couldn’t take the highs of August away. So this current breach is certainly a positive sign for the markets. But is it enough?

NIFTY- A Slight bearish take

The prices are facing one of the most, important tests in the coming days. Next week, we can see the smoke and mirrors clearing a bit, and the top calling skeptics validated or the bottom fishing bulls rewarded. Either ways, a lot of it hinges around the price action of next week. But why?

The red line, the lazily moving red line across the charts is the 200 day moving average(DMA). Prices moving over this, reflect a very strong bullish momentum and a possible beginning of a bull market. Note the word possible. It reflects the consensus over 200 days, roughly equal to a trading year. Interestingly, if prices do move over this line, with seemingly good volumes, then I will grow a lot more optimistic. But the prices has to breach and stay above it,  that too with good volumes, if bulls and “long term buy only investors” have any hope of coming back in the markets.

In a different twist, if markets bounce off this level, then its certainly a ride to hell. Notice a similar situation from mid May 2008, prices failed to stay above the 200 day moving average and it crashed, tanked and rolled to form one of the legs of the bear market. And certainly given the situation and the ferocity of the bulls, I can well hazard a guess that bears will be equally ferocious if not more.

But what if, prices breach and stay above the 200 DMA, it will require a major act of faith and confidence to move it above the blue trend line. Well, I don’t think at least this will be absent, because if bulls are alive till now then its only on hope and faith. What else do they need, if prices breach 200 DMA tomorrow! So the major roadblock ahead is the 200 DMA of 3411.

But lets not have a simple myopic vision of judging a plethora of stocks with just a 50 share index. There are a few if not tens of stocks which have convincingly entered a bull phase. Two wheeler manufacturer HEROHONDA is at a 52 week high. So is pharma behemoth CIPLA. So investors and stock pickers should be on an active lookout for stocks with nice charts and prices.

Unsurprisingly, $GOLD looks like it has put in a substantial top and inching down, below the 200DMA. It is quite interesting to note, technically we had one bull run in GOLD, a short lived bear market in the chart before GOLD surged ahead and had another small run up.

$GOLD: Bearish Glitter

The failure to breach the previous top has put in quite a bit of skepticism in my mind, but that doesn’t necessarily make me bullish on bourses, int’l or otherwise. $SPX or $NDX is nowhere near its 200 DMA, although the breathe is undoubtedly  bullish. And that’s what makes me hang up a huge question mark on the sustainability of this rally.

Even a lame reason could be: The reason for which it got started, didn’t get solved. End of Story.

Hence, concluding:

I am buying in Indian markets, but with very strict stop losses and fingers on the trigger, for a few selective scrips. This can be named as “speculative” calls by “fundamental seeking long term investor” friends in the community. But what the heck, I am a trader, and that too a pure price action fella.

I am neutral on Indian markets, as of now, and maintaining a very close watch on the present scenario. If NIFTY moves and stays above 3410-3450, then I will certainly turn bullish on India.

But, my experience says, that bear market bottoms don’t form like this. It frustrates the bulls and frustrates the bears. Volatility flies out, and sentiments turn towards an apathy for the stock markets. In short, the day, people mouth invectives for uttering the word “bottom”, I will go long, real long.

Disclosure: He has significant exposures in Indian stocks but none of which mentioned here. Though, those who take his advisory may carry all/some/none of the stocks mentioned in this article.

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