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Range Bound NIFTY,inching towards overbought levels

May 1, 2009

Indian markets in the last one and a half month or so, have rallied  fiercely on the upside. Enthusiastic buying across the entire length and breadth of the market has given a huge fillip to the bulls. Hope to the unsophisticated, Joy to the observers and answer to the prayer of all those who have been sitting on their losses over this bear market.

As of 29th April 2009, which was the last trading day of the month, out of 235 scrips being traded in derivatives, around 27 of them breached 200 Day EMA and retraced back. Almost triple of this number, 68 to be exact , are trading above the 200Day EMA. So taking this rally on the face value, around 95 scrips have breached 200day EMA at some point in the last 45 days. Validating the “across the board” bullish hope quite nicely.

The 50 share index on its own entered a period of a consolidation with 3510 as its top and 3350 as its bottom. Although the range is quite tight around 150 points or so, and the volatility [measured by 15 Day average true range] is circa 100 points, hence it can be well expected that a day of heavy selling is complemented by a next day heavy buying.  That’s precisely the situation right now, and the traders have made quite a bit of money selling strength and buying weaknesses [including the author]. But there are certain important caveats which can help :

  • 50 share NIFTY has broken the intermediate trendline, sometime back as mentioned in my previous blog post in Jump Up. The intermediate trendline starts from the correction which came in Indian markets in the last week of March.
  • 50 share NIFTY has also breached the long term trendline on 28th April on the back of heavy selling.[Fig 1]
  • Indian volatility index has breached a previous resistance and in lines with its mean reverting nature is falling back due to the consolidation the underlying benchmark is undergoing.[Fig 2]
  • Put Call ratio on NIFTY for the near month was at 0.91[edit on 04th May 2009: immediate historic high 1.60-1.94]. It has jumped in the last few days indicating a bullishness in the outlook.
  • The very short term overbought/oversold indicator is not even throwing a faint alarm. But yes, its inching towards it.[Fig 3]
  • But the falling volumes on upside days is a major concern for smart bulls.
  • Consolidations are usually stopping or breathing points for the market players, and its natural that the price series is consolidating after such a huge move.
Fig 1: Trendline Play

Fig 1: Trendline Play

Since last week my trading system has exited some of my longs and reentered some fresh positions. Personally, I have nurtured a huge amount of bearishness in my point of view in the last two weeks. Since the time NIFTY breached 3411[200 Day moving average] to be exact. But to be honest, traders like me can’t live with biases. If I consider the indications of the charts and the numerous other factors I think this rally has got some more steam left. I won’t be surprised to see 3650-3700 levels but I still believe bear markets don’t end like this.

Fig2: VIX

Fig2: VIX

On the hindsight, one of the key forecasts of being bullish on Indian markets, made on the beginning of 2009 has given some good results. In fact, the 30 share index BSE Sensex is trading at a 6 month right now. You can check the performances of other biases I was having since the beginning of this year is here [thank you for the commercial break]

Fig3: Not yet, but almost there

Fig3: Not yet, but almost there

Disclosure: None, but fresh longs in NIFTY might be soon initiated

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