Nifty Enters a Phase of Uncertainty

Nifty  consistently made newer highs last week as it crossed 7800, and belied all hopes of  a correction after a marathon run in the past few months. Post consolidation  in a sideways range Nifty reached oversold levels on the weekly charts, thus giving rise to fresh breakout over 7800.

With the supreme court ruling on coal block allocation, the strong uptrend has been  interrupted as the the market enters a phase of uncertainty over the fate of coal block allocations. Next week will be crucial as the market reacts to the GDP numbers and supreme court decision on coal blocks.

With the hourly trend oscillator crossing the daily oscillator, a trend change was forewarned by the TTO at 7900 levels, but for the up move by the extreme short term (15 minute) oscillator which propelled the Nifty to 7960. Nifty remain in a short term SELL mode and a breach of 7888  will confirm the downtrend which may take Nifty to 7800 levels and is likely to consolidate in this range. Any positive news, however may take Nifty to 8400 which may lead to some serious profit booking.

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BackTest Results for Nifty Trades (Long+Short) for July 2014 with TTO

Has India VIX Lost its Significance ??

India VIX or the Fear Index as  it is generally known, used to indicate "Fear of Highs" is at its all time low for Nifty.The reason that the VIX  is so low because either everyone is bullish about the stock market or they are being ridiculously complacent about the downside risks. Maybe this is part of the story but there is a bit more to it - A low VIX could lead to lower premium on puts used to buy downward protection.

Generally, the VIX is supposed to be negatively correlated to the indices, but in the context of Indian markets, which are witnessing a structural bull phase, the relationship seems to have been lost. India VIX no longer can be used as a reliable tool to forecast market direction as can be seen from the  following chart. The previous two highs in India VIX in September 2013 and May 2014 have been followed by fresh uptrend in Nifty. Similarly, the VIX bottom during March 2014 have resulted in fresh market breakout. So does the current all time low in India VIX indicating a fresh uptrend ??

The fact is that the VIX is not an "Fear Index " and never has been. It's a just a measure of  options premium.  As the markets go up, volatility increases and so does the risk premium as the investors and fund managers rush to insure the downward risk in their portfolios. However, as the market becomes stable at the higher levels, the fear of FALL recedes and VIX falls and so does the option premium.  The VIX DOES NOT lead the equity market, it follows it.

INFY Leads the Market

In the absence of any significant contribution by Reliance, ONGC and other market heavyweights, the market was looking for leadership from the other leggards in the tech sector which have been underperforming the market for a while.

In our update Will INFY Lead the Market ??   dated July 31, 2014, we had considered the possibility of INFY taking over the leadership and support the market which was under tremendous pressure in the wake of geopolitical developments and was threatening to break important levels. Further, in our earlier update Is the Worst Over for Tech Stocks ??   dated  June 25,2014 we had indicated a turnaround in the tech stocks.

With Rupee toucing the crucial support of 58 and reversing, the tech stocks have reversed the downtrend  and look to retest the recent highs.

Seen below is the Relative Performance of INFY, which has outperformed Nifty and almost all other stocks.

Reliance at Crucial Levels !!

Reliance has been consistently showing weakness and at present is  precariously poised at Rs. 980.

The scrip has made H&S formation on daily charts and any close below present levels may take Reliance to Rs. 780 which may drag Nifty down considerably. Hence, it is important that the levels of Rs. 980 for Reliance are maintained. The bulls will have to use all their might to protect these levels.

Though the scrip has shown some divergence at  the lower levels, we will have wait to see if the scrip reverses from the present levels.

How Nifty Consolidation Has Played Out !!

The following weekly chart  shows Nifty progression since the upmove started in August 2013. The indices is presently in a consolidation mode since June 2014,  after the second upmove which started in March 2014.

With strong uptrend on long term charts, the recent two consolidations have been  range bound, sideways consolidations.  While the first consolidation ( 1st blue box) lasted nearly 15 weeks,  in the present consolidation (2nd blue box) we are in the 9th week and every possibility that the present consolidation may extend beyond 15 weeks. However, the chart structure seems to indicate that  a breakdown below 7440 may not happen or would be rather short lived.

It would also be important to note the placement of trend oscillators on the TTO.  All the three oscillators, long, intermediate and short term oscillators are placed higher than that on the previous occasion, thereby indicating the possibility of a shallow correction and Nifty making a significant new high, once the uptrend resumes. The Nifty has reached oversold zone on weekly charts and may continue its sideways move for some more time.

 And a more detailed daily chart :

Nifty Headed to 7880-7900 ??

Nifty found support at 7640 levels to end the short term downtrend.  The daily and hourly oscillators are in oversold zone indicating the possibility of a new uptrend.

A cross above 7720 on closing basis would take the Nifty to 7880-7900 levels. A failure to cross 7720 and reversal and fall below 7640 would indicate further downside to 7550.

Why Nifty may not give a significant correction !!

There is a unanimous opinion that Nifty is due for a  correction of  8% to 10% in the near term as the market as run up significantly since March 2014 and looks to be running ahead of the fundamentals. Those who missed the rally are sitting on the sidelines waiting with glee for an opportunity to enter the market.

Technically, Nifty has been  in a sideways consolidation mode since June with a  broader range of 7500 - 7800.  A bull market may typically go through time correction rather than a price correction. Though monthly charts show oscillators in an overbought territory, the weekly  chart presently is in an oversold zone. The weekly chart being oversold at a Nifty  level of 7700 indicates strength of the market. Further the weekly trend  continue to show strong uptrend without any divergence or weakness  indicating the trend is likely to continue for some more time and Nifty may  target a new high before any major correction can take place. A caveat is, of course, any adverse developments which may affect the global financial markets as a whole.

The weekly TTO chart continues to be in a bullish alignment mode indicating market may surge on the slightest hint of any positive development or policy announcements. The weekly ADX continues to be at 45 with DI+ at 32.85 and DI- at 11.65, indicating continuity of uptrend. With the medium term oscillators strongly placed, any significant correction may continue to elude the market and it would be suicidal to short the market just on the basis of a short term weakness.

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