Bulls still alive: Why current market fall is not a bearish confirmation

Despite the huge fall in the market this week the bull is still alive. However, if the Nifty and Sensex make a lower low a bear could emerge at least for the medium term.

A lower low is when latest low in price is lower than the previous low. There are two factors supporting the bull. The US indexes--Dow and S&P 500 making new highs- and the indicator still showing positive divergence. Interestingly the Indian markets which had been stronger than the US markets earlier in the year has now turned relatively weak. This is so as US markets have been climbing to new highs but the Sensex and Nifty have to still breakout of their all time highs.

So why do we think that the current fall is not a bearish confirmation?

In a bear market the index makes a series of lower highs and lower lows. A lower high is when the latest high in price is lower than the previous high. Now let us take a look at the chart above. The lower lows and lower highs are shown by the yellow arrows. The first arrow on the left is a low after which the index made a high shown by the red arrow. Then the index made its first lower low shown my the middle yellow arrow and then made its first lower high shown by the second red arrow.

Next the index made an equal low shown by the yellow arrow on the right of the chart. Now if the index makes a lower low then bear is likely to take control. This is possible but the commodity channel index shows that the bear is weak. In our previous articles we had spoken about positive divergences. A positive divergence happens when the commodity channel index is moving up even when the price is moving down. This essentially shows that that bear does not have strength.

There is also a growing feeling the market that the bull is now self sustaining and that a tapering of the Federal Reserve's easy money policies will not do lasting harm to equities. AFP

There is also a growing feeling the market that the bull is now self sustaining and that a tapering of the Federal Reserve's easy money policies will not do lasting harm to equities. AFP

A look at the chart will show that index fell on Wednesday, Thursday and Friday and came down the a previous low. However a look at the commodity channel index at the bottom of the chart did not touch its previous low, but in fact made a higher low. This is sign that the bull is still alive. But now the bull has a resistance level created when the market fell this week and that is around 6200. That level and the all time highs must be cleared for the indexes to truly break out.

There is hope for the Nifty when it opens on Monday as the an exchange traded fund, INDY, which tracks the Nifty rose almost one percent on Friday in the US markets. This increases the probability that the index could rise when trading begins next week.

The strongest factor supporting the Indian markets is the fact that the US markets are still grinding their way up. This is most likely going to provide an impetus to the Indian bull. There is also a growing feeling the market that the bull is now self sustaining and that a tapering of the Federal Reserve's easy money policies will not do lasting harm to equities. The market feels that there might be a correction but the indexes will rally back up again.

If that really happens remains to be seen. But for now the Fed has not given any indication that it plans to taper anytime soon.


Updated Date: Dec 21, 2014 03:54 AM

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