All trends indicate further downside

Ongoing bearish trend will reverse if Nifty pulls above 5,400.

The long-term trend of the market turned bearish in November 2010, though this only became apparent in January 2011. On November 5, 2010, the Nifty peaked at 6,338 and it then corrected to a low of 5,721 on December 10. Subsequently on January 4, 2011, it hit a lower high of 6,181 – suggesting the trend had reversed. The downtrend was confirmed when the next low came, far below, at 5,177 on February 11. In the down-move, it also dropped below the 200-Day Moving Average (DMA), usually a reliable signal.

The long-term trend of the market remains down. The pattern of successive lower tops and bottoms remains in force. This was confirmed last week, when a new 52-week low of 4,947 was created. It is far below the 200-DMA, currently at 5,665. As of now, the intermediate trend is also clearly down and the short-term trend may be down as well.

Where can we expect the trend to bottom out? Historically, bear market retractions tend to find support at what technical analysts call Fibonacci retracement levels. Considering the entire move from the low of the previous bear market (2,250 in October 2008) and the high of the previous bull market (6,338), retracement levels are marked at the 23 per cent, 38 per cent, 50 per cent and 62 per cent levels. These are respectively, 5,400, 4,800, 4,300 and 3,800 (all figures have been rounded to make these more easy to remember).

The first Fibonacci retracement level has already been broken. The second, at 4,800 (marked as the ‘first retracement’ on chart since it is the next likely support), will see a fair amount of support. If that is broken, the third level at 4,300 will be the next target. Then, it would be 3,800.

Markets rarely experience a totally linear trend – there are corrections within corrections. The next intermediate trend would be north-bound. It would probably not be very strong. The key resistance would lie along the 200-DMA. That is at 5,660 at the moment but the average itself is falling.

Expect each Fibonacci-level to provide support and enable a pullback to the previous Fibonacci-level. For example, if the current intermediate downtrend ends close to 4,800, we could expect a pullback till around 5,350-5,400. Similarly, if the market falls till 4,300, the subsequent pullback would be till 4,800.

It must be remembered that Indian bear markets can be very severe. Retracements below the 62 per cent Fibonacci level (3,800 in this instance) often occur. The next Fibonacci-level would be around 79 per cent and mean a pullback till 3,100. Between January 2008 and October 2008, the previous bear market saw a pullback from 6,357 to 2,252, so the downside could be even more severe.

In terms of time, the previous bull market lasted between 19 and 25 months, depending on interpretation of the period between October 2008 and March 2009, when the trend was indeterminate. This bear market has lasted 10 months, which exceeds minimum time projections, whichever calculation is used. It could last anywhere between 12 and 16 months (November 2011-March 2012) if the normal time parameters hold good. It may last even longer — 20 months (July 2012) is the next time zone for a likely long-term trend reversal if the 12-16 (months) projections are exceeded.

We’d expect the rest of the year to see further net losses. The 4,800 level will definitely be tested and 4,300 may be tested if the downtrend intensifies. On the upside, there would be hope of the bear grip ending and a long-term trend reversal if the market (Nifty) pulled above 5,400 and the 200-DMA, wherever that may be.