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The Rediff Business Special / Biju Samuel

Birth of a new bull market

After constructing a launching pad for nearly six months, the stock market had an explosive breakout in the week ended January 7, 1999, confirming a bullish reversal of the primary trend.

The vertical run of the indices on the last three days, especially that of the Bombay Stock Exchange's 30-share Sensex that spurted by nearly 200 points, has come as a huge surprise for many. But not to a chart-reader given to dissecting the market movements: he would have examined the swings to detect if it confirms the possibility of a new bull market.

This vertical run is not a surprise in the current market situation. It is a major criterion which has to be satisfied for the market to declare a bull market reversal of a larger nature price-wise as well as time-wise.

A look at some of the major technical aspects is necessary here to understand the real nature of the market advance. One crucial factor in any advance is whether the rise is a correction of the previous decline or whether it is the start of a new uptrend.

The surge from Wednesday indicates that it has pierced through a correction channel and then sustained the breakout beyond the overbought situation.

Overbought situation is a condition where technical indicators reach higher levels. The recovery in a bear market does not sustain beyond the overbought points. In other words, one of the important characteristics of a new major uptrend is the ability of the market to get overbought, sustain the move there and get more overbought, sustain there also and get mega-overbought.

This mega-overbought condition is an absolute necessity and no corrections should occur before that. The week's upswing satisfies this criteria.

The initial push into the overbought zone will attract caution from traders who are otherwise used to market breakdowns from such overbought levels in the bear market.

This triggers profit-booking and reluctance to hold on to long positions further due to a seemingly overheated market. But the trend possesses such strength that the profit-taking liquidations are absorbed by the market and it records fresh spurts.

Once the market continues its ride, the reluctant and cautious players will find it difficult to resist the temptation to get in again lest they may lose on further spurts.

This will develop the next set of market spurts. This sequence of caution at higher levels, mild reactions or brief breakdowns followed by further spurts can be witnessed next week.

The current lower badla (rate of carry-forward charges) indicates two things: 1) the genuine nature of the buyers whose buying was largely delivery; 2) trader-reluctance to carry-forward considerable positions, which again indicates room for fresh demand even at the higher levels next week.

As the ground for this market breakout was constructed over a period of nearly six months, it can be viewed as the building block for a long-term bull run rather than just a mini-bull run which has been the style in the past three years.

The grounding was accompanied by a major falling wedge formation with sustained bottoming indications in the technical indicators of the market, followed by the breakout which happened around the 3050 area. The immediate target for the market is to see Sensex at 3525 while the support zone is currently in the region of 3270 to 3300.

At the current juncture, the conclusion is that the market has given the confirmation of a reversal in favour of a new bull market. Hence, reactions have to be viewed with buying interest to ride the next leg of the bull run.

The writer is a Bombay-based stock market strategist.

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