Tuesday, June 24, 2008

New Lows in the Nifty: What Next ?

The NSE50, India's benchmark stock market index hit a new 10 month low by closing at 4150, down from the lofty highs of 6350 recorded in January 2008, just five months ago.
The Market is in a bear grip, with lower highs & lower lows recorded at periodic intervals.
"I told you so"
Sorry about this, but the current leg of the down move started when the Nifty moved below 4950, a minor low. This down move was highlighted in my newsletters (http://www.technicaltrends.com/) and on CNBC India, many times. Since this down move started, I have consistently maintained that we remain in a bear market. The reasons are based on simple technical analysis. The Nifty continues to follow a pattern of lower highs, lower lows. So far this continues, the intermediate down trend remains intact.
New lows are bearish. Following this principle, every move by the Nifty to lower levels causes a ripple effect by which further declines are initiated.
How will this process of lower levels, end ? After all, even bear markets will come to a termination, some time or the other. After a 35% decline, the Index will eventually have to start a process of 'base building' or consolidation at the final lows. This process could take months. In this period the Nifty will try to test the final lows recorded and will eventually have a successful test of the lows - meaning that the Index will remain above the last recorded lows and withstand selling pressure. This is how the next bull market will start.
As I write this today, the index is making new lows therefore the process of base building has not even started. While the decline continues, it is not possible to call the end of the bear market. The Nifty could stop right here, or go down to 3600 or in a worst case scenario, go down to correct all the way to 2600. It is not possible to forecast the point at which this decline will end. My own guess is: the broad support zone between 3600 to 4200 will probably be the point at which the bear market ends. It could be 3600 since we have already broken down below 4200.
All of this is just guess work.
Yet, fortune favors the brave. With every new decline in the Nifty, the market comes closer to its eventual lows. Some buying in strong sectors may well be done, if you have spare money. With the disclosure that I am myself buying these sectors: fertilisers (Nag fert, Chambal) and Natural Resources (Neyvelli, Cairn) are currently under focus.