Still Very 'Gloomy'

The Nifty continues to make lower lows. It was expected to find support near 4900 but it broke through that too. The charts are looking more and more bearish everyday. It closed lower than the close on the ‘Black Tuesday’ last month. Not only that, it also closed below its 200 day moving average, which was giving it support at 4975. One should remember that the 200 day moving average is a very significant level to break. Seeing the chart it is clear that this moving average has been tested on 5 occasions in the last one year but the Nifty has never been able to close below it.

What is a moving average? Till now, I have been using trendlines on my charts in the newsletter and I’m sure all of you would be aware of trendlines and their significance and the supports and resistances provided by them. In simple words, trendlines are sort of an average of prices and it is expected that prices will find support/resistance there. Moving averages are basically moving trendlines and they are actually an average of the closing prices of the price of ‘x’ number of days. Most significant moving averages used by chartists are 5 day moving average (DMA), 10 DMA, 20 DMA, 50 DMA, 100 DMA and 200 DMA depending on the time period one is looking at. It is generally said that the index/stock is bullish above a trendline and bearish below it. Prices below the 200 day moving average are indicative of a bear market. It has been seen in the past that the prices have been able to close below the 200 day moving average but soon cross over again. I would, personally, give the Nifty some time to recover. If it were to stay below this moving average for the next five sessions, then I would have a very negative view on the market . Five consecutive closes below it will be bad for the markets.

At the bottom of the chart today, I have included a new indicator – MACD (Moving Average Convergence Divergence) instead of the RSI. The signal that we get from MACD is that we should buy when the green line crosses above the red line and sell when it comes below it. Even after coming to such extreme levels (it has never come down to such levels in the past one year), it has again given a sell signal. We are probably heading towards our target of 3800-3900. But before that 4530-4550 is a key level to watch. Support there can bring us back in the running for newer highs. For now, it is just wait and watch.

We still are in a long term bull market (if 4500 is not broken) and our strategy in bull markets should be to buy on dips. This is, without an iota of a doubt, a dip. Then why are we scared of buying now? Well, fundamentally, India is still on a high. Among all emerging markets, India is the best placed, demographically, to see a sustained rise in the economy. And if the economy is doing well, nobody can stop the markets from rising. But as suggested earlier, lower levels are possible and one should take the opportunity to buy now, but with a stop loss of 4500.

Happy investing!!!

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