Bull market in sight with breakout on several patterns

The domestic equities extended gains for the third successive week. Due to event risks, the benchmark indices traded with higher volatility. The NSE Nifty gained 330.35 points or 1.86 per cent last week. BSE Sensex is up by 1.7 per cent. Nifty Midcap-100 and Smallcap-100 gained by 2.3 per cent and 0.9 per cent, respectively. Nifty Metal index, up by 7.5 per cent, is the top gainer. The Pharma and PSU Bank indices gained by 2.9 per cent and 2.7 per cent. The only loser is the Private Bank index with 0.04 per cent. Market breadth is broadly positive. The FIIs bought Rs6,160.11 crore in the last four trading sessions, and the DIIs sold Rs3,388.96 crore worth of equities.

Despite several recession warnings and further rate hikes, the Indian benchmark index registered a fresh breakout this week. The pullback rally in the global market is a positive factor, which is influential in the domestic market. The Nifty cleared the resistance on 2nd November with above-average volume, indicating that the Indian stock market can lead the next bull market in global equities. But in the following two days, the profit booking led to the drop in gains. As the event risk faded, the Nifty once again closed above the resistance and protected the breakout on a weekly basis.

The Nifty has formed a strong bull candle on the weekly chart. It rallied by 8.17 per cent or 1369 points since the 30th September low in just 23 trading sessions. As it also cleared the sloping trend line resistance drawn from October 2021 highs, it decisively closed above the prior swing highs. By sustaining above the sloping resistance line for the second week, the Nifty has negated the implications of expanding the triangle or broadening the formation's bearish implications. This breakout, though a marginal one, came after several failed attempts. The frontline index broke out of a bullish flag kind of pattern on Diwali muhurat trading. It traded in 279 points range and sideways for a whole week. The fresh week began with two consecutive huge positive gaps with improved volume. The FPI's are back again with aggressive buying.

With several pattern breakouts confirmed, the bull market is on the cards. The previous highest closing prices are 18,255.75 and 18,338.55. If we connect these two price points, the Nifty closed above this sloping trendline resistance. A close above 18339 on weekly closing basis will be a big positive for the market. If the Nifty sustains above this zone, the immediate target is at 19210. Before reaching this target, the index may face resistance at 18364 and 18663. At the same time, the support is at 17784, which is a parallel closing high range. Only a close below this will be a short-term negative.

Interestingly, the Nifty is trading above all key moving averages. But, only 20DMA is in an uptrend. The 50DMA and 200DMAs are flattened, yet to enter into the uptrend. Currently, it is 3.61 per cent above the 50DMA and 6.76 per cent above the 200DMA. This is the longest distance after 18th January. The 20DMA support is at 17,582, which is 3.16 per cent away. Generally, the distance increases the prices to pull back to the average. The Nifty closed above the Bollinger band on Tuesday, later back into the bands as they expanded again at the weekend.

Historically, the majority of corrections were limited to 13 months and eight months. The current corrections are in the 13th month. In this 13th month's correction, the Nifty has corrected only 18 per cent. This is the lowest correction level. Earlier, the major corrections were at least 25 per cent. Our earlier forecast of the Nifty target 18,950 will be revised, and it will close above 18,339 decisively on a weekly closing basis. In all practical probabilities, a close below 50DMA, 17,537, will be negative for the market. The RSI on daily and weekly charts is above 60 and in a strong bullish zone. It also cleared the prior swing high.

But, several concerns are weighing in on the market. Last month, the Federal Reserve indicated the recession. The WTO and the IMF also warned of recession. Quantitative Tightening to control the inflationary pressures may result in a squeeze in liquidity. The Federal Reserve met this week and raised the interest rate by 75 basis points. It said further hikes are imminent. The Dow index has been trading nervous for two days due to event risk and closed positively by 401 points on the weekend. The DJIA rallied over 14 per cent, since the 13th October low in just 12 trading sessions. The Dollar index (DXY) is moving higher after a decent correction. A close above $112 means the dangers are looming over the equity market.

In a nutshell, the global markets are still trying to regain strength, and the Indian market is at a nearly new high. Let's watch closely about this outperformance. Historical facts suggest we are end of the corrective phase, though the correction target has not been met. If the global recession is a reality in 2023, it will not be easy to see the new highs.

(The author is Chief Mentor, Indus School of Technical Analysis, Financial Journalist, Technical Analyst, Trainer and Family Fund Manager)