Index Outlook

March 14, 2012

The Golden Cross passing baton in favour of Bulls

Nifty Price Matrix
52 Week High 52 Week Low 50 Day SMA 200 Day SMA 52 Week EMA 100 Day SMA 5944.45 4531.15 5193 5163 5227 5063

Domestic benchmark indices jumped more than 20% from the start of 2012 defying broad scepticism over the sustainability of the up move on the argument that not much has changed fundamentally to support this liquidity driven rally. Various crucial events are lined up in the current month. The first of this (state election results) is already out of the way and the next major events the RBIs monetary policy review and the Union Budget are scheduled later this week. However, despite the above factors, price structures taking shape in the current scenario indicate a major shift in trend direction.

Golden Crossover
In keeping with everyones watchful expectation, the NSE Niftys 50 day moving average at 5177 on March 12, 2012, rose higher than the 200 day moving average (5163), thus generating a Golden Crossover (Exhibit 1). In technical parlance, when a medium-term moving average (50) crosses a longer-term moving average (200) from below, it is termed as a Golden Cross. As long-term indicators carry more weight, the Golden Cross represents a major shift in momentum from bears to bulls and indicates a bull market on the horizon. Additionally, the long-term moving average (200 DMA) becomes the new support level in the rising market. Conversely, the Death Cross restores bear power when the 50 DMA falls back beneath the 200 DMA.
Exhibit 1: Nifty Daily Chart

Analyst
Dharmesh Shah dharmesh.shah@icicisecurities.com Nitin Kunte nitin.kunte@icicisecurites.com Dipesh Dagha dipesh.dagha@icicisecurities.com

Source: Bloomberg, ICICIdirect.com Research

In the above chart, the blue line is the 50 day moving average while the red line is the 200 day moving average. Marked by the blue arrow, the medium term moving average crossed higher than the longer term moving average on March 12, 2012.

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Historical performances of Nifty post Golden Cross and Death Cross:

As one of the basic tenets of Dow Theory is History repeats itself, market technicians lay greater emphasis on historical evidences to base their opinions. We, therefore, take a look at Niftys performance post occurrence of this event over the past decade (Exhibit 4).
Exhibit 2: Historical behaviour of Nifty post Golden Cross

Crossover Date 26-May-09 26-Oct-04 7-Jul-03

Nifty value 4116 1780 1140

Up move post event (%) 6 months 25.1 20.8 75.4 12 months 31.2 48.9 75.4

Throwback post event (%) 5.2 2 4.4

Source: ICICIdirect.com Research

Exhibit 3: Historical behaviour of Nifty post Death Cross

Crossover Date 4-Mar-11 28-Mar-08 17-Jun-04 Nifty value 5538 4942 1512 Down move post event (%) 6 months 14.2 23.1 4.7 12 months 17.8 54.5 4.7 Pullback post event (%) 7.4 6.2 -

Source: ICICIdirect.com Research

Exhibit 4: Nifty Daily Chart

Source: Spider software, ICICIdirect.com Research Source: Bloomberg, ICICIdirect.com Research

There were three instances in the past 10 years when the Nifty witnessed a Golden Cross. The data listed in the table shows the index performance post the event over the next six and 12 months, implying that a golden cross does not arrive too late to provide forward returns. Of course, that does not mean that the markets will automatically head increasingly higher from here. A base building process or correction can well be under way in the near term.

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Exhibit 5: Golden Cross on Major Nifty Constituents

Stocks with recent Golden Cross Name SBI Infosys HDFC Bank Maruti HCL Tech NTPC Wipro IDFC Jindal Steel Event Date 12-Mar-12 2-Jan-12 22-Feb-12 29-Feb-12 5-Mar-12 7-Mar-12 20-Jan-12 2-Mar-12 13-Mar-12 Name ACC ITC Hind Unilever Bajaj Auto Cairn India Tata Motors Sun Pharma Stocks where crossover has already occurred earlier Event date 30-Sep-11 April 2009 7-Jun-11 11-Aug-11 12-Jan-12 28-Jan-12 Jun 2009 Returns post event 35% 120% 33% 25% 18% 22% 103%

Source: ICICIdirect.com Research

The above table exhibits the list of major Nifty constituents, which have witnessed a Golden Cross over the past few weeks viz. SBI, Infosys, HDFC Bank, NTPC and Wipro. Stocks like ITC, TCS, Bajaj Auto, ACC, Tata Motors and Sun Pharma have generated the Golden Cross much earlier and have clocked handsome gains post the cross over. Price action in stocks within the Nifty like IDFC, JP Associates and Jindal Steel and Power has also fetched the golden cross recently. However, these stocks do not hold significant weightage in the Nifty. Some key names like Axis Bank and HDFC are trading above their 200 day moving average. However, they are yet to witness Golden cross. The 50 day moving average in these stocks is currently trending higher.

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Pankaj Pandey

Head Research

pankaj.pandey@icicisecurities.com

ICICIdirect.com Technical Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai 400 093 research@icicidirect.com

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