Reasons why Nifty entering in a bear phase:
1. Breach of a major support trendline:
Trendline 1 (Red line) which joins the lows from March
2009(2556),December 2011(4756),May 2012(4950),April 2013(5550).We can see a
higher top higher bottom formation, but due to the recent mayhem in the markets, Nifty has
made a lower bottom. Nifty has breached the trendline and is currently trading
below it. Breach of such an important trendline starting from the 2009 lows
could mean that we enter a down trending market for at least next 6 months .
Going into the past,we had another significant support
trendline[(Blue) from May 2005 to March 2008] getting breached in June 2008
after which markets plunged from 4650 levels in June 2008 to 2500 levels in
November 2008 i.e. approximately 50% in
a matter of 5 months. Although the reason for such a steep fall was recession
in western countries. But one thing is noteworthy that
LEHMAN BROTHERS filed for bankruptcy only on September 5,2008 but
the charts had signalled a breakdown months before the event actually occuring.
2. Bearish Evening Star Candlestick Pattern:
The candlesticks highlighted above
confirms to a pattern called as “Evening
Star Pattern” .This is a bearish pattern formed on daily charts of Nifty. It is
valid till Nifty trades below the high of last red candle i.e. 5717.
3. Negative
crossover of Moving Averages:
Also if we look at longer time
frame charts i.e. on the weekly charts of nifty, moving averages have given a
negative crossover (10 Week Moving Average cutting 21 Week Moving Average from
top).Also MACD is in negative territory signalling one can even short this
market at current juncture. Moving averages in green and purple line whereas
MACD at the bottom of the figure shown below:
4. Symmetrical Triangle Breakdown:
The figure below is candlestick chart of Nifty as on 16th
August,2013:
On the daily charts Nifty has broken out of Symmetrical
Triangle pattern. It has also given
weekly closing below the support trendline with huge volumes . Hence the
above observations make a case for a further downside. Theoretically the said
pattern has a target of the height of the triangle i.e. 6210-5500=710 points
downside from the point of breakdown i.e. 5660-710=4950.Time frame to achieve
4950 target is the time taken to form the symmetrical triangle i.e.
approximately 4 months. So if analysis
comes true we should be staring at 4950 levels on Nifty around December 2013.
5. 200DMA
:
The 200 day moving average is the
decisive line below which one should exit all long positions and if market
sustains above 200DMA one should be long in the market. When a stock or a index
trades consistently below its 200 DMA ,it is considered to have entered into a
bear phase. For Nifty 200 DMA is at 5850.After nearly 4 years, Nifty and 80% of
its constituents are trading below their 200 day Moving Averages. The rest 20%
constitute of stocks from Pharma FMCG and IT Sectors.The stocks from these
sectors are outperforming the major indices since fundamentally these companies
benefit from weakening rupee as they earn their revenue in dollars.
Hence i would like to conclude that if Nifty continues to
trade below the support trendline and 200DMA then probably there is something
wrong going on. And that something could be:
a)
Fed starts to taper its QE Program in September.
b)
India faces rating downgrade due to ballooning
CAD, weakening rupee and policy paralysis by rating agencies like Moodys, Fitch
and S&P .
c)
RBI instead of reducing REPO rates starts to
increase in order to defend rupee and contain inflation and in the process
sacrifices growth.
d)
Earning downgrade by big brokerages on
lacklustre Q2 performance.
e)
GDP growth of sub 5% from previously expected
5.7-6% for FY14 leading to outflows by FII’s.
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