Bullish signals for 2010

SI Team / New Delhi January 4, 2010, 0:35 IST

The markets were on a roller coaster over the last two years which made it difficult to
predict the road ahead. The Lehman collapse in 2008 and the credit crunch thereafter
created an air of uncertainty and investors shied away from risk. Though this resulted in
the indices touching multi-year lows in March 2009, the recovery when it came has been
consistent and strong. With the markets holding steady and worst behind us, our panel of
technical analysts predict that the bulls will be in control in 2010

Net gains in 2010

Devangshu Datta

On January 8, 2008, almost two

years ago, the Nifty peaked at its
all time high of 6,357. After that,
the trend reversed into a short,
very deep bear market. On
October 27, 2008, the Nifty hit a
three-year low of 2,252. From
peak to bottom, the index lost 65 per cent.

The six months between October 2008-March 2009 saw consolidation followed by range-
trading between 2,500-2,900. Since March 2009, there’s been a big turnaround. The Nifty
has surged past the 5,000-mark, with positive background indicators. Volumes have
jumped and the ratio of advances-declines has improved.

It is clear the major trend is bullish. That has a few implications. One is that the market
should continue to see a pattern of rising tops and bottoms while the major trend stays up.
A second is that this uptrend should eventually result in the January 2008 highs being
overtaken.

Right now, the chart pattern of the Nifty is quite easy to interpret. The market has been
forming an inverted head and shoulders (H&S) pattern between May 2008 and now. The
neckline of this bullish 19-month formation is between 5,200-5,400, which is why there
is a great deal of resistance just above current trading levels.

As and when the market clears the resistances and moves above the neckline on higher
volumes, there will be a sharp upmove to a projected target of 6,000-6,200. There is very
little resistance between 5,400-6,100 because the market moved extremely fast in that
zone in early 2008. So there will be an accelerated uptrend on any breakout past 5,400.
If the major trend remains bullish this will be the normal outcome. There is a fair chance
that this will occur in calendar 2010. Normally, Indian bull markets last longer than nine
months. So we would expect net gains in 2010.

However, major trends do reverse and inverted H&S formations have been known to fail.
If the resistance at the neckline holds, the bull market may find support and consolidate in
the range of 4,600-4,800. The support in the 4,600-4,800 zone is crucial. There has been
a great deal of trading congestion there and the 200-day moving average is at the bottom
end, reinforcing support. Below 4,600, the market will see a major trend reversal and
probably turn into a bear market.

A third possibility is that the market will mark time, range-trading between 4,600-5,400.
This could occur for an extended period while resistance between 5,200-5,400 is tested
and cleared. However, a decisive trend, either up or down, appears more likely in 2010.

There are several danger signals, which the trader may wish to track. One is that the
Nifty’s valuation, as expressed in PE, is high at around 23. PE is a mean-reverting ratio,
which can generate technical signals. It tends to revert close to the long-term average,
which is 18 for the Nifty. The ideal situation would see EPS grow fast and PEs drop
while prices rise. This combination of rising prices and dropping PE has happened in
earlier bull runs.

Another potential danger is higher interest rates. There is an inverse relationship between
rates and stock prices. Rates are rising. High stock prices can be sustained only if the rise
in interest rates is moderate.

A third factor to be watched is FII attitude. The market may not be capable of generating
the volumes required to hit 6,000+ in the absence of strong FII buying. Two months of
sustained FII selling would call the major trend into danger.

What about other sectors and subsidiary indices? Smaller stocks as tracked by the Nifty
Junior and the Midcaps and CNX500 will move in the same direction as the Nifty.

The CNXIT has outperformed in the past two years and it appears capable of
outperforming the Nifty in 2010 as well. The Bank Nifty looks flatter - it could be an
underperformer because financial sector stocks will be hit harder by rising interest rates.

There are two other sector indices worth mentioning due to heavy weightage. One is the
CNX infrastructure index, which tracks stocks across various infra sectors. The infra
index has been an underperformer and among its segments, power appears the most
bullish.

Another subsidiary index - the CNX Realty - carries clear warning signals. Realty is not
yet back in a bull market as a sector. It could be the most disappointing performer of
2010 since there is huge resistance above current levels as well.

The author is a technical analyst

Rally may not last beyond Q1, 2010
Mukul Pal

Absolutely speaking, India is in a trading range for two more years, relatively speaking
it’s time to shift allocations.

It’s the time of the year, where we account for what we got right and where we were off
the mark. This is what we said in our annual outlook in January 2009 and what happened.

On target
Anticipated - ‘We won’t be surprised if prices retest October lows or breach them
marginally in early Q2, 2009. And this means selective stock picking and minimising
market exposure by doing quantitative long short strategies. 13,000-15,000 is an
achievable high for Sensex in 2009.’

Happened - Sensex touched 15,521 in June 09 and now prices are 16 per cent above
15,000. The October 2009 low 7,699 was tested marginally in March 2009 at 8,047.

Anticipated- “BSE Metals was the worst performing sector of the year with returns of a
negative 72 per cent. We expect it to deliver better returns.”

Happened - BSE METALS was up 339 per cent.

Anticipated - “Long BSE 500 and short Sensex also seems an attractive pair.”

Happened - The pair was up 14 per cent till date from March lows, up 5 per cent from
March - June 2009.

Anticipated - “Don’t get too much into the negative mode despite all the crisis and a
majority of this is foolish talk.”

Happened - Assets moved up 100 per cent to 300 per cent after Mumbai attacks. You
can’t say we did not try to convince you. We wrote on ‘History, markets and terror’
explaining why the Mumbai attacks didn’t happen at a market top. We wrote ‘Russia Oil
and the Global low’.

Anticipated - “The expected bounce should be choppy and time consuming.”

The markets rose clearly from March to June and then got into choppy sideways action.

Anticipated - “The tech reversal - January, 26 2009.”

Happened - Technology reversed and pushed up 191 per cent.

Where we got it wrong

This is what we said on July 24.
 Anticipated- “We repeat the best of 2009 is nearly over
and any upside from here should barely reach double
digits (less than 10 per cent) for the 12 indices we
discussed.”

Happened - Though BSE OIL, BSE FMCG, BSE REAL,

BSE POWER did not cross 10 per cent gains since July
24 high, the rest of the nine indices broke the 10 per cent
barrier. On average, all sector indices registered 19 per
cent gains since July 24.

Though we said the expected bounce should be choppy

and time consuming, there were sectors and indices that
grew without a pause like CNXIT.

‘Performance cycles’ is a term coined by us at Orpheus.

This is another name for time triads, time arbitrage, time
fractals but expressed in terms of relative performance.
It’s a bounded oscillator that moves in a fixed range say
1-30. 1 is top relative performance and 30 is worst
performance. The idea is that performance is cyclical. A top performer will underperform
in future and vice versa. A top relative performer is also the worst value pick and the top
relative underperformer is the best value pick. We have carried the quarterly numeric
ranking for Nifty 50.

Top performers for Q1 2010 - Reliance Infrastructure, Grasim, RCom, Bharti, Reliance,
L&T, Jaiprakash Associates, DLF, Idea, Ambuja, Reliance Capital, Reliance Power,
Suzlon, Unitech and ABB. The top underperformers for Q1 2010 are Punjab National
Bank, Jindal Steel, Cipla, TCS, Tata Motors, Wipro, Ranbaxy, Tisco, HDFC Bank, SBI,
Sun Pharma, M&M, Infosys, GAIL, and SAIL.

The passive way of investing using performance cycles assumes that you have 30 stocks
with 10,000 Euros each in the 30 stocks. Now you close the top underperformers and
reinvest the cash proceeds into the top performers. The active way to play on
performance cycles is to go long top performers and short top underperformers. This
would need pairs, value hedging and beta classifications and of course understanding of
leverage.
 Regarding the overall
market direction, we can
look at time again. Markets
go up when the time
confirms and vice versa.
Time fractal approach
means that if we need a
view for the 12 months and
few weeks ahead, we need
to see how time is placed
few months and weeks.
This is what we did. We
plotted the time (days) between intermediate trends.

The time indicator is an oscillator. A rising oscillator indicates a trend and a falling
oscillator indicates counter trend. At this stage the intermediate time indicator is still
rising suggesting there may be further upside. Any rally in Indian markets should not last
beyond Q1 2010 (high of 2010). At this stage however, we see the market opening
positive on January 4 and pushing higher.

A net positive 2010 is a low probability scenario at this stage. India is in a multi-year
trading range for us, something like the 1990’s US bear market which lasted for four
years. Till the time we get clarity on the absolute performance, we will stick to the
relative performance, get out of today’s top performers and get into today’s top
underperformers.

The author is CEO, Orpheus Capitals, a global alternative research firm

All is well
Gautam Shah

The year 2009 witnessed the best performance by the Sensex ever as it registered a gain
of more than 80 per cent (9,650 to 17,500), which unbelievably beats the yearly
performance of the bull market period of 2003-2007. The year started off on a pessimistic
note on account of the Satyam fiasco, which only helped the markets find a bottom as the
scenario could not have worsened as most negatives were already discounted.

Thereafter, the uptrend came into place and got stronger with one resistance level being
taken out after another. The rise was interrupted with short corrections that only made the
uptrend healthy. Technically, we believe that the rally last year is part of the larger bull
market that could potentially take the markets to fresh highs in 2010. Let us look at some
of the technical tools to understand the set-up and take a direction call for the year ahead.
Simple Dow Theory
By failing to make a lower low in March last year and eventually moving above the level
of 10,900 in April 2009 the market confirmed a “Dow Theory” buy trigger as it reversed
the trend of lower tops and lower bottoms. Despite the correction in the months of June,
August and October 2009, the markets remained in buy mode as per “Dow Theory” as it
continued to make higher tops and higher bottoms. The last significant bottom/low of
15,300 now becomes a simple yet important support for the Sensex this year, which
investors need to take a note of.

Pattern screening
Market rallies are always backed by major bullish patterns and we have seen a number of
them last year. Firstly, the
Sensex broke out of a large
“Symmetrical Triangle”
pattern in April 09 that
confirmed a major trend
reversal. Secondly, the
indices formed a downward
sloping “Channel” pattern in
June-July 2009 that helped
“digest” the big gains of May
2009. Thereafter, in the
month of September 2009 the
indices broke out of a large
‘Inverse Head and
Shoulders” pattern at levels
of 15,600/4,650 whose effect
is being seen currently. This
pattern gives us bullish
targets beyond the lifetime
highs of 21,000/6,200. Based
on candlestick studies the indices formed a “Piercing” pattern on the monthly chart,
which was an excellent follow-up to the October 2008 correction.

Oscillator and moving average screening

The monthly oscillators hit a three-year high in September 2009 with a reading of 97.8
(On a scale of 0-100), which was a bullish development.

This only meant that the study was far from creating negative divergence, which is a
requirement for a trend reversal to take place. Do note, multiple legs of divergence
backed the decline in 2008 on the same study. Clean uptrends are always backed by the
moving averages, which has been the case since April 2009. The indices have been
sustaining well above the averages and every correction in the last nine months has seen a
halt and reversal from the same (See Exhibit 2). The longer-term averages currently
provide support in the 15,800-16,500 zone that would almost act as a base for the Sensex
in the months ahead.
Sector preferences

Banking
The banking sector has been a major contributor to the market rally last year. We spotted
an important “Inverse H & S” bullish pattern breakout in the month of September 2009
(See Exhibit 1) at the level of 7,500 (CNX Bank Index). This breakout was well
supported by other technical studies like Elliot, moving averages and momentum
indicators. If the pattern plays out the way it should then the banking index could easily
test a level of 12,000 in 2010 yielding a return of close to 35 per cent. We recommend a
buy on any and every decline with support in the 8,200-8,500 zone.

Oil & Gas

Interestingly this index heavyweight sector has underperformed the market indices in the
last six months. The range-bound trading action has taken shape of a huge bullish
“Triangle” pattern with the neckline at the level of 10,700 (BSE Oil and Gas Index). A
close above the same, which is likely any time in the next few weeks would accelerate
the medium-term uptrend and take the index to 13,500 levels, if not new life highs, within
the first half this calendar year.

Conclusion
The entire technical set-up explained above indicates that the markets are in the next
phase of their long-term bull market that should see them register substantial gains in the
first half this year. The second half of 2010 could be a difficult or corrective period based
on technical and cyclical indicators. We believe that the indices would continue to make
higher highs going forward that would be interrupted with short corrections without
damaging the overall uptrend.

The trading base for the market is seen in the 15,500-16,000 zone (4,550-4,600 on the
Nifty) and any decline close to the same should be used as a buying opportunity. The
long-term bull market base is within the 12,500-13,000 zone. We maintain our
conservative medium-term target of 5,550/19,000 while the best-case scenario level
stands at 7,000/23,000. Apart from our best sectoral picks, banking and oil & gas, we
expect outperformance from the capital goods, PSU and mid-cap segments.

The author is a Chartered Market Technician, VP and Technical Analyst, JM Financial