Indian Equities: Right time to start building your portfolio

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Our last short term update on 12th January read:

“Nifty opened lower yesterday and has managed to close the opening gap formed yesterday. Markets managed to bounce from 7494. The price structure looks corrective, but considering the volatility we recommend getting out of your short trades if markets cross 7633. The shorts can continue to target the gap measuring target of 7422 mentioned in our last post as the hourly chart indicates that the bounce from 7494 is corrective.”

Our January 8th report forewarned and we quote:

“The swiftness of the move and increased volatility means it would get increasingly harder to trade these moves.”

The way markets behaved in the last few days is nothing short of astounding. Yesterday, Nifty made a low of 7426, and yet recovered to close around day’s open (which by the way was a gap up opening). The bulls ended up seizing the day from the bears on a day which has been surrounded by extreme bearish sentiment (outlined below) and just when most people thought that bears would dominate.

It is important to note that the sentiment surrounding this move has been pre-dominantly bearish:

  1. India -ve IIP growth for November
  2. Inflation ticking up and interest rate cut hopes going down
  3. China yuan devaluation and oil plunge
  4. Increasing geopolitical unrest
  5. etc. etc.

It is very important to see that there is not one good fundamental factor as it seems today. Hence, it is also no surprise that when stocks were in a free fall from over 7580 levels to 7426 (and closer to 7426-7475), we had the following analyst opinion hit the markets:

“Market may see 5-10% correction around budget”

“Nifty may fall to 6300”

(Interestingly for the 2nd last article, the headline was modified after the markets closed. By the evening the editors even found some neutral articles to be added.)

While our target of 7422 was based on a gap measuring technique, from a short term Elliott wave count perspective too the targets were close to 7410-7420 levels as the 5-wave count was coming to an end. So, it was to be expected that such a fall, specially in light of the fact that it triggered a breach of the upper end of the Modi Era Support Range may lead up to extreme bearish sentiment, and hence the rally from the lows was not surprising. The question today is that are the fundamentals and sentiments bearish enough for the low of 7426 to be the turning point for a correction that has been in play since March of 2015.

We suggest it is definitely possible, but we would only be able to confirm once we see a substantial 5-wave impulsive rally of the right degree on the upside. But even if this isn’t the case we believe that we are very close to the bottom and this is the ideal time to start building (or measured averaging) your portfolio. Many good stocks are available at far more reasonable valuations today. Also there is a high probability that the wild targets of 6300 and 10% further corrections may not materialize at all.

At the very least we suggest that further shorts should strictly be avoided as it is very likely that the incremental gains for short positions (even if they materialize) would be low. Accordingly there is a major risk of getting caught in sudden bullish rallies going forward.

As for the gloomy scenario surrounding the world markets, we duly note that the central banks world over have poised their economies in a precarious situation which would only end badly and more rudely than the 2008 crisis. The refusal of governments and central banks to actually fix their broken financial system has ensured that it is not a question of IF, but When. Can India buck the trend if such risks materializes and authorities cannot kick the can further? Probably Not! In light of this our first warning sign for a major bearish scenario unfolding would be Nifty breaking the trend channel (Channel A) outlined below to the downside. The ultra-conservative investors can wait for the channel to be broken on the upside for confirmation before buying, but then they should be ready to pay higher prices. In order to improve their entry we have drawn another channel (channel B), a break of which can be used to initiate portfolio building. Chart below:

[sociallocker]Nifty 14th January[/sociallocker]

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