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Our market has turned weak! In all likelihood, a bear market is certainly a possibility. The weakness signs that lead to the onset of a bear market are also visible in major markets like the US as well.

While a pullback rally to 4860 is entirely possible, the probability of the downtrend resuming soon enough is quite high given the nature of the weakness in weekly charts.

Once we put things in perspective this becomes quite clear as to why we should reassess the situation and shift our stance about the condition of the market. First, till date we have seen three intermediate upswings in this major uptrend that began last year on March 06 from the Nifty level of 2539.45; the first one got terminated at 4693 on June 12: a run of 2154 points in 14 weeks from the low of 2539; second upswing from July 13 till Oct 20 lasted for 14 weeks and had a price swing of 1263 points from 3918 till 5181; and the last one from November 03 last year till January 06 this year was much shorter-a little over just one-third in price terms of the first intermediate upswing mentioned above-it was a swing of 772 points that lasted for nine weeks. The upswings, thus, have become progressively smaller in terms of prices and in time terms first two had been equal and the third one lasted for a much shorter span of nine weeks. This phenomenon of time and price swings getting progressively smaller in intermediate uptrends is definitely a sign of the bull market weakening.

Now, let us look at the corrective downswings in between: first one lasted for 31 calendar days from June 12 till July 13 last year, price swing was of 675 Nifty points; second one is much shorter in time duration-it was a sharp downswing-lasted for only 14 calendar days from October 20 till November 03 last year, and had a price swing of 643 points. The current downswing is already 31 calendar days old the bottom has not been established as yet. Its price amplitude so far has been 618 points. If it were to fall below 4635, by any chance, even on intraday basis it would be the largest downswing in terms of both price and time. This suggests a probable turning of the major trend from up to down.

However, calling the current market a bear market would be a bit too premature since the 200-day moving averages (MAs) are located at 4650 (both EMA and Simple MA). Since this would be the first test of the 200-day MAs--after they have been crossed from below by the Nifty on Apr 23, 2009--there is every possibility of a rebound after testing it or from a level close to it. Notwithstanding such a possibility, we can say that the Nifty would find it really difficult to cross 4950 levels now: as it is that has established itself as a strong resistance and two, the downward-sloping 89-day EMA is also located close by, which would now act as a strong supply point.

This bull market for all practical purposes has been driven by liquidity in domestic economy and FII inflows. Both are on reverse gear at the moment. FIIs are mostly sellers and the RBI has already started tightening. Internationally, Australia and China have also opted for monetary tightening and they did it much earlier than we did. The signs are pretty ominous for the US as well: during the last week of January, FED deputy chief Kohn had already hinted and warned banks in the US to prepare for higher interest rates. The very-important 70% mark has not been breached by the number of stocks in the S&P 500 that are above their 200-day moving averages; however, it is almost there and might just achieve it unless there is a sharp recovery right away.

Unless the governments and the central banks decide to inject massive quantity of money again to stem the rot in PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries the situation would not become better for world markets. Japan’s debt level is also worrisome at 220% of the GDP. Bond markets are jittery and the commodity markets have also lost their gumption being dependent more on the fuel of liquidity: copper and lead have slid quite a bit again.

What should be our strategy now? Since we anticipate that there could be a rebound rally we should use it to get out of most stocks unless we decide to be long term investors who would hold stocks for much longer than a year’s time. Anywhere, between 4900 and 5000 levels of the Nifty any pullback attempt would terminate; hence, use that to exit this market: Budget expectations notwithstanding.

The resistance levels for the Nifty now would be 4812, 4839 and 4866 while support is likely to be found 4736, 4716 and 4650.

Rajat K. Bose