Technical indicator suggests major upside for Nifty

On four occasions since 2003, the occurrence of Golden Cross has led to gains ranging from 30 to 77 per cent for the market

Markets fell significantly on Thursday. However, the Nifty made an important and rare pattern, known as Golden Cross, which indicated a bullish trend ahead for an extended period, if technical analysts are to be believed. “The Golden Cross occurs when the short-term moving average, such as the 50-day moving average (DMA) of the underlying index crosses the long-term moving average, such as the 200-DMA,” said Sushil Kedia, member, board of directors at Market Technicians Association, Inc. It is considered by some technical analysts to indicate the end of a downtrend and the start of the new uptrend.

According to a study by Dharmesh Patel of Emkay Global Financial Services, prior to this and after 2003, there were four occasions when Golden Cross signals had occurred with a trendline breakout (on the upside) and none of the time, this strategy had seen a downfall (see chart).

Dharmesh said, “This is the fifth occasion when history is repeating itself. Considering the average return of 47 per cent until the next Dead Cross signal (a reverse trend), we feel taking an ‘All-in’ bet is a practical approach. The point is you need to be greedy at some point of time and fortunately, this is the right time.”

At 5,207.77, the Nifty’s 50-DMA has crossed and taken a lead of 43 points, compared to its 200-DMA, which is at 5,164.1. Over the last decade, this particular event took place four times. And every time, the Nifty’s 50-DMA moved above its 200-DMA and the index made strong gains from that particular point. If we average the returns (ranging 30-78 per cent) of all the four events, it works out to 47 per cent. Even if the Nifty gains 30.7 per cent (the lowest gain recorded in 2003), theoretically, it could rise to around 7,000 levels.

Date of Golden Cross

Date of dead Cross

Days

% Return 

17-Jul-0318-Jun-0434730.74 227-Oct-047-Aug-0664976.71 316-Aug-0628-Mar-0859047.81 426-May-097-Mar-1165033.05 512-Mar-12NANANA Source: Emkay Global Financial Services

However, even if it were to record such gains, it may not happen quickly, going by the past track record. On the last four occasions, though the trend was upward, it took 559 days, or almost one-and-a-half years, on an average for the gains to materialise. For instance, from the Golden Cross point perspective, the Nifty made the largest gain of 76.7 per cent between 2004 and 2006, or 649 days before the reversal or the Dead Cross took place. A reverse trend or Dead Cross occurs when the opposite happens, that is, the 50-DMA breaks below the 200-DMA (as depicted in the chart).

Though the Golden Cross proved to be right in the last four occasions, investors should nevertheless tread carefully, say experts. “It’s a fairly reliable indicator and it makes a case for the bullish market. But as technical analysis is based on probability, there’s no guarantee this time, the Golden Cross will prove right. As long as the Nifty holds 5,000 levels, I’m bullish on the markets, with a target of 5,700 on the upside,” said Vijay Bhambwani, chief executive of BSPLIndia.com.

There are others who believe in these indicators, but like Bhambwani advise investors not to get carried away. “One should be aware that the success probability of success of the Golden Cross is about 60 per cent. I am, in general, bullish on the Nifty and if in any month it crosses 5,650, the next level to watch could be 6,500,” said Jitender Kumar, a technical analyst at SBICAP Securities.