Indian Market - "The NaMo Trade begans"

Almost 40 months back in November 2010, I wrote, “To continue with my last post, I have presented the long term monthly chart of Nifty. In the given chart we can see that Nifty is trading within two equi-distance channel. The upper end of this channel (where the market faced resistance in January of 2008) is at around 22700.

Therefore as per the technical analysis the market will not move above 22700 on Sensex. This view is also supported by the current valuation which is near its all time high. 

We can also observe that this channel is not a very steep channel . So unless this channel is broken the upside in the index will be very limited. This implies that Sensex will either move sideways or will correct for next few years. 

The probability of any breakout from this channel is almost negligible, but if this channel break out substantially than the next target for index will be above 40,000. Looking at the global economic scenario this is a highly unlikely scenario according to me and the only reason why it may happen is in case of Hyper - Inflation. When a economy faces hyper-inflation the prices of all hard assets increases as the value of currency evaporates. This scenario is highly unlikely according to me. 

This is my preferred scenario where market will move side side ways between a range of 24000 - 12000 for next five years before it eventually breaks above the channel line and reaches 45,000 by the end of this decade”

Market played out exactly as per my expectations the only difference is that we are seeing a breakout a year earlier than I expected and that is primarily because of extremely high inflation, which had brought down real value of stocks even more severely then what we can observe in nominal prices

If we look at the first chart we can see that Sensex had convincingly broken out of long term resistance of 21300 after spending almost 5 months in the range of 19000 - 21000.  If we get a monthly closing above 21500 then the implication of this breakout are going to be severe.

Continuing form the same charts I have pasted 4 years back if we look at Sensex it is trading between two equi-distance channel. Since I am assuming that market will give a monthly closing above 21500 the target for this breakout comes at round 25000 levels which is the upper end of the channel. 

In the same chart you can also see that Sensex has refused to break the trend line which started since 2003. Hence the trendline should serve as an effective stop loss for all long positions. The stop loss for nifty based on trendline comes at around 18500 -19000 levels. All long investors should exit the market if Sensex closes below these levels.

In the third chart we can see that Nifty is on the verge of breaking out of an inverse head and shoulder formation.  The target for this formation comes to around 7400 – 7500 on nifty.

The last chart is the daily chart of Nifty. We can see that Nifty is trading between two parallel channels. Nifty will face resistance at 6700 levels i.e. the upper end of the channel. Once it breaks above 6750 – 6800 the target for this channel come at 8000 – 8200 levels.  

Summary

• Nifty has broken out of long term resistance of 6350.
• The target for this breakout is at around 7500 – 8200
• Long term investors should put a stop loss of 5850 on weekly closing basis
• Nifty will face minor resistance at 6700 – 6800 levels.
• ·         I think the probability of this scenario playing out to be more than 70%