Not Every Upside Is a Bull Market

Be nimble footed enough to actively stay in lookout and utilize one of those violent bear market up rallies. It might help you to cut your losses, realign your sails and reassess your options.

-Surviving Shocks and Crisis, Layoff Tracker, Jan 31, 2009

Asian stocks should see a good recovery by 09Q2.

-2009: What to Expect and what not to Expect, Seeking Alpha, Jan 01, 2009

Indian markets are at a crucial juncture. Cynics of this move are dying a cold death every day, with the 50 share index NIFTY inching higher each session. At present, NIFTY is at a 5 month high, presently trading at 3360-3400 levels. There were quite a few stocks which could have been used, even in this secular bear market, to numb the losses of so called “long term investors”. But is it time to jump in? Is it a buy? Charts please!

[NIFTY: 2 Year prices and mildly bullish take: Click to Enlarge]

This is chart of NIFTY over past two years. It contains the last phases of a bull market and a bear market. The green line, is a 50 day rolling average. It in a nutshell, it shows the 50 day average consensus of the price series. The blue line is the 20 day rolling average. The yellow trendline is the primary trend line from the bull market top of Jan 08 to the present.

Interesting to note is the current rally of NIFTY from the March lows of 2500 (this bear market low is ~2250). It has surged 36% and breached the long term trendline quite strongly. The breach occurred at circa 3150 (incidentally Jan 09 highs) and NIFTY is still going strong, and neatly chugging away. And this is indeed a positive sign. We had such a breach in September 08, but the rally was lethargic and lacked any “zing” to it. It couldn’t take the highs of August away. So this current breach is certainly a positive sign for the markets. But is it enough?

[NIFTY: 2 Year prices, a slight bearish take: Click to Enlarge]

The prices are facing one of the most important tests in the coming days. Next week, we can see the smoke and mirrors clearing a bit, and the top calling skeptics validated or the bottom fishing bulls rewarded. Either way, a lot of it hinges around the price action of next week. But why?

The red line, the lazily moving red line across the charts, is the 200-day moving average (DMA). Prices moving over this reflect a very strong bullish momentum and a possible beginning of a bull market. Note the word possible. It reflects the consensus over 200 days, roughly equal to a trading year. Interestingly, if prices do move over this line, with seemingly good volumes, then I will grow a lot more optimistic. But the prices have to breach and stay above it, and with good volumes, if bulls and “long term buy only investors” have any hope of coming back in the markets.

In a different twist, if markets bounce off this level, then it's certainly a ride to hell. Notice a similar situation from mid May 2008, prices failed to stay above the 200 day moving average and it crashed, tanked and rolled to form one of the legs of the bear market. And certainly given the situation and the ferocity of the bulls, I can hazard a guess that bears will be equally ferocious if not more.

But what if prices breach and stay above the 200 DMA? It will require a major act of faith and confidence to move it above the blue trend line. Well, I don’t think at least this will be absent, because if bulls are alive till now then it's only on hope and faith. What else do they need, if prices breach 200 DMA tomorrow?! So the major roadblock ahead is the 200 DMA of 3411.

But let's not have a simple myopic vision of judging a plethora of stocks with just a 50 share index. There are a few if not tens of stocks which have convincingly entered a bull phase. Two wheeler manufacturer HEROHONDA is at a 52 week high. So is pharma behemoth CIPLA. So investors and stock pickers should be on an active lookout for stocks with nice charts and prices.

Unsurprisingly, $GOLD looks like it has put in a substantial top and inching down, below the 200DMA. It is quite interesting to note, technically we had one bull run in GOLD, a short lived bear market in the chart before GOLD surged ahead and had another small run up.

[$GOLD, 2 year charts: Click to Enlarge]

The failure to breach the previous top has put in quite a bit of skepticism in my mind, but that doesn’t necessarily make me bullish on bourses, international or otherwise. $SPX or $NDX is nowhere near its 200 DMA, although the breathe is undoubtedly bullish. And that’s what makes me hang up a huge question mark on the sustainability of this rally.

I am buying in Indian markets, but with very strict stop losses and fingers on the trigger, for a few selective scrips. This can be named as “speculative” calls by “long term investor” in the community.

I am neutral on Indian markets, as of now, and maintaining a very close watch on the present scenario. If NIFTY moves and stays above 3410-3450, then I will certainly turn bullish on India.

But, my experience says, that bear market bottoms don’t form like this. It frustrates the bulls and frustrates the bears. Volatility flies out, and sentiments turn towards apathy for the stock markets. In short, the day people mouth invectives for uttering the word “bottom”, I will go long, real long.

Disclosure: The author has significant exposures in Indian stocks but none of those mentioned here.

Comments

[investor88:]

A sensible view of the markets, riding the optimism with a hand on the TIGHT stop loss trigger. That's what many are doing, myself included.

Someone wisely said let the market speak, and follow its trends. With a couple of failed rallies in the past 18 months, we cannot the possiblility of another one lurking but hoping for the best.

With the fundamental underbely soft, surfing this bull wave has to be done with care. May not be business as usual.

Apr 12 06:56 AM

[Alan Young:]

Excellent analysis, thanks--I appreciate a well-balanced view. Looking for stocks in India that have successfully broken the 200-DMA will be my next exercise.

Apr 13 02:14 AM