7% gain in 3 weeks, what next?

Nifty closes above 200 DMA, rally comes from not so prominent stocks contributing for the gains. On Friday it was Bharti and today it was Yes Bank. Both are not fundamentally great ones. After a steep correction when there is a recovery, the general pattern is to go up and get back to lows.

Now the pattern seems to be changing course. When there is a steep rally and deep correction, which gets back to median without sufficient strength. The next course is consolidation. Presently we are in this area. Consolidation will bring more pain to traders with many whipsaw or losing trades, where they will shy away from the markets and then let the market take its direction.

With state elections due in December, where the expectations are fairly against the central power, it will trigger the next sell off. Crude Oil which was a big concern when it rose in price till a couple of weeks back has now suddenly turned opposite. Media headlines are “Beware! Lower Oil prices foretell sooner than expected Global slowdown”

When it goes up we are worried, when it goes down yet we are worried. Currency was high, it impacted the economy, now it goes down more than 5% from its peak, exporters are worried. Our country needs exports to perform well to bring in dollars. If that slows down due to uncompetitive prices, again we hit the reserves issue.

So delicate are our requirements. What is likely to happen? Tussle between the Government and the RBI is now one more worry. Govt wants RBI to relax lending to SME’s, it is a good gesture while that should happen only to quality businesses. Just for the sake of funding, we get into an urgency and give out funds. That will end up adding to more NPA’s. RBI agrees to infuse 8000 crores of liquidity into the markets. A small breather though.

Oil might take time to move up as the depth of correction is very high, while the currency is not in the same zone. We should see currency reaching for a new peak very soon, which can bring some uncertainties in the market.

From July to mid-November, traders made big money as the markets took a swing on both sides, now it is time for them to give back some gains. Among the index heavy weights, very few stocks have strength to move up like Hindustan Lever, HDFC Bank & L&T all others don’t have patterns that can take them to a bigger rally. Even those that are showing little strength, all of them are in their end stages, over head resistance will be high as they reach their top.

AS we keep climbing higher & higher the height of correction gets higher. As of now we have recovered more than 7% from the bottom. Strong resistances are just above the present price levels for the index. So we should be prepared for a 8 to 10% correction, where the previous bottom will get breached. When that happens, volumes should be low, which will happen because weak hands would have moved out due to prolonged correction. Then we will start our next rally.

Many of the stocks in the market are having patterns that require a test of lows to get strength. All these data coincides supporting a big correction which can come in mid December or early January.

For those waiting on side-lines, the next low is going to be a great opportunity to enter markets because they have the potential to make an easy 20 plus percent gains which can come in the next 12 to 15 months.