Bulls retain grip on Nifty and rupee - thanks to reforms

The bears have not been able to take control of the Nifty even though the index is in a zone of oversupply. The index receded a bit during last week but rallied again on Friday.

Like we said last week, the bear case is still in play unless the Nifty closes above 5,740. Last week's price action showed that the bull is still in control and the medium-term trend remains bullish. This conclusion is arrived at by looking at the impulse and correction sequence. The trend of the market is generally in the direction of the impulse and the impulse is identified by the strong move and correction is the weak move.

The recent rally, which began from the 5,200 level, has had strong upmoves and weak downmoves. This is how the price action generally looks in an impulse correction sequence. The index may rise 100 points in a day and then take three or four days to fall by about 30-50 points. Then it could rally again by about 80 points in a day, make a new high, and then fall about 40 points in the next few days. If one looks at the rally from Nifty 5,200, which we had identified as a buying level in a previous column, the impulsive rallies and weak corrections are evident.

For the Nifty, we feel that the level between 5,694 and 5,738 is a resistance zone, from where the index is very likely to turn lower.

Last week, too, the index fell very slowly and then rallied strongly on Friday, showing that the uptrend is still intact and bulls are still in control. Many of you must have heard the truism: "The trend is your friend." But we are not sure if you heard the rest of the line and this is how it goes. "The trend is your friend till the bend at the end."

Trends generally end at resistance zones. Resistance zones are levels where the supply of stocks exceeds the demand for stocks. For the Nifty, we feel that the level between 5,694 and 5,738 is a resistance zone, from where the index is very likely to turn lower. Hence, for aggressive traders, that's the level to short and, if they did, they would have made some money last week. If you are not willing to short, at the very least it is not the time to buy at these levels.

Bears can still stay short with a stop above the 5,740 level. The potential loss for a short position at these levels is low compared to the potential profit. In the market, one should never be a permanent bull or bear. If the trend shows signs of changing or has changed one should change one's bias. So if the Nifty breaks the 5,740 level bears should abandon their short bias.

One final note to the bears. Don't lose hope as the market bounces around near the resistance zone. It can do it for days or weeks. Always keep in mind that it is very difficult to kill a bull. Most people are seasoned to be bullishly biased. Even governments are geared to announce policies, both good and bad, to push up the stock markets. So it does take time for a bullish sentiment to turn.

Indian rupee

The INR, meanwhile, broke a resistance level against the US dollar. The resistance level was at the 54.25 level. With the resistance level broken, the rupee has a few other levels, which may cause temporary selloffs, but we feel that the next strong resistance level is between 48.50 and 49.50. Reaching that level would be quite a rally.

See what a little dose of reform can do to the currency, which was on its way down to 60. Oh, and it is not just reform on the part of India that is pushing up the rupee. There is the other element of the US Federal Reserve and the European Central Bank ready to debase their currencies to "help" their countries.

In India, the Reserve Bank has stuck to its strong money policy and must be given kudos for not relenting much to the government. But the RBI itself could not save the currency or the economy. Now, with the government falling in line, the hope expressed by the markets may be fulfilled.

George Albert is Editor, www.capturetrends.com

Updated Date: Dec 21, 2014 04:54 AM

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