A longish bear run for Indian markets

By virtually any technical measure, the Indian stock market is seen to be experiencing a primary bear market. The model I use to come to such a conclusion objectively involves a combination of price and momentum.

In terms of price, a consistent but certainly not perfect relationship is that between the price and its 12-month moving average (MA). This approach has worked quite well for the Indian market in the last couple of decades. The brown dashed arrows point up the inevitable whipsaws, of which there are relatively few.

The momentum aspect of the model is provided by my KST indicator, which is constructed from a summed rate of change. The model goes bearish when both the Index and momentum are below their respective MAs. Such periods have been shaded on the chart.

Look at Chart 1, where for instance, you can see that the BSE 200 is below its 12-month MA and the long-term momentum classifies the current environment as bearish. In order to reverse this trend, we would need to see both series move back above their MAs. In the case of the Index itself, such an action would also take it above the green trend line. That average at the close of 2011 lies just below 2200. Unfortunately, technical analysis offers few pointers as to the magnitude and duration of a projected price move. However, the fact that the momentum is now around the equilibrium level suggests that the decline is probably halfway over, though of course, a reversal could be signalled at any time with a move above 2200 or wherever the MA might be at the time.

Chart 2 shows the weekly performance of the Nifty, together with its momentum. The two lower panels show the same thing for relative action against the MSCI World Stock Index. Earlier in the year, the Index completed a head and shoulders top, declined and experienced a trading range. The key now is to see whether it breaks below the range, which would indicate a new down leg in the bear market, or if it holds above its previous low at 4700 and then moves above the extended neckline and the previous Friday’s closing high of 5400. If it does so, it would cancel the bearish head and shoulders, and suggest that a new bull market is underway.

In the meantime, the Indian market faces a critical test, since the relative action is just above key support in the form of the trend line and the 180-month MA. Since the momentum for relative action is in a bearish trend, that would appear to be the most likely outcome.

My conclusion, therefore, is that Indian equities are in a primary bear market, and whatever opinion we might hold, we should assume that that trend is in force until the facts change. Those facts, at this point in time, would be a decisive month-end close by the BSE 200 above 2200 or a Friday close by the Nifty above 5400