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Beware of this suckers rally; Nifty likely to correct up to 5% from presumed top

As risk-reward ratios are not favourable, traders are advised to exit their long positions as Nifty rallies into the critical resistance points.

It is rightly said that the ways of Mr. Market are mysterious as Dow chose to hit new life-time highs even in the midst of geopolitical tensions, whereas its peers among the developed economies are 3-4 percent away from registering new lifetime highs as on Thursday’s closing prices.

However, in the emerging market space, especially among the BRIC Nations, Indian equities are just at a kissing distance away from hitting new life highs and looks ripe for a correction, whereas Brazilian Bovespa appears to be on the cusp of a new bull run as it has just broken out of its 2008 highs and is sitting one percent above the breakout point of 73,920. STOCK FREE TIPS

Shanghai Composite, which is almost 45 percent down from 2007 highs of 6,124, remained as an underperformer but for the last couple of quarters appears to be positioning itself for a fresh leg of upmove as it has been in consolidation mode for the last five quarters.

Hence, some of the emerging market flows may get diverted into China and especially Brazil if it witnesses a sustainable breakout above 73,920 levels.

ALSO READ: Time to make your portfolio electric, and bullet proof; 20 stocks to bet on

On the domestic front, Indian indices are trading at historical Price Earnings multiple of 24x and Price to Book of around 3x, which were languishing around 9,800 levels for four weeks, suddenly gathered traction with a gain of one-and-a-half percent in the last week.

It is quite natural to attract the attention of traders as it is once again trading close to new lifetime highs. But, the moot question at this juncture is - what next after 10,137?

Are the indices capable of adding substantial value beyond this level? Unfortunately, our pattern analysis, as well as long-term trend studies, are pointing only limited upsides beyond 10,137 with critical resistances placed around 10,450 on the long-term charts escaping which may be very difficult for the bulls.

Our analysis from Elliot wave perspective is clearly suggesting the end of one price cycle around 10,137, warranting at least time-wise correction if not a bigger price wise as pointed out in this column on August 26.

In line with those projections, the last five weeks of laboured upmove can be categorised into Wave B inside a corrective structure called Flat in terms of Elliot Wave parlance.

It is a 3-3-5 structure with the second leg being a counter-trend rally, which in this case is the upmove being witnessed from the lows of 9,685.

This upmove should perish from around 10,137 levels or slightly add 1 or 2 percent to that point from where a disastrous C leg should unfold, thereby taking the indices all the way back to 9,685 levels. C leg will end below 9,685 to complete the corrective structure.

Hence, in light of above discussion, upsides in the best case are limited towards 10,450 levels which are 2-3 percent from current prices whereas downsides are below 9,685 which can be greater than 5 percent from the presumed top.

As risk-reward ratios are not favourable, traders are advised to exit their long positions as Nifty50 rallies into the critical resistance points as pointed out instead of presuming the rally to be a bigger strength as it will end up trapping the bulls.

What may work for next week: Eye on IT

IT counters are suddenly looking attractive across the board with promising trading opportunities available in both in the frontline as well as top-tier mid-cap names. We like HCL Technologies and Tech Mahindra in this space.

HCL Technologies can be bought for an initial target of Rs912 with a stop below Rs867.

Tech Mahindra can be a good buying opportunity for a target of 483 with a stop below 432.

Disclaimer: The author is Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in. The views and investment tips expressed by the investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
www.shristocktips.com

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