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Data Jan 26, 2013

The Bank index will outperform if Nifty hits all-time high

By George Albert

The two major indices, the Nifty and the Sensex, continue to move up and their upside targets mentioned in last week's article are still in play.

The bulls had a scare this week with strong down days but the support levels were not broken. The support level is shown by the red horizontal line on the Nifty chart. (Click here for the chart). When any asset class has rallied for a long time and is close to all-time highs, it's susceptible to price reversals. Also the journey higher is choppy, as witnessed during the past few weeks.

However, the bull is still strong and this is seen by the impulse correction sequence in the market. Price usually travels in the direction of the impulse, unless it's right into a resistance zone. Resistance zones are areas where the supply of stock exceeds demand, leading to a fall in price. In an uptrending market, price tends to have strong up moves (called impulse) and weak down moves (called correction). In a falling market, price tends to have strong downmoves and weak upmoves.

Bombay Stock Exchange. Reuters

Bombay Stock Exchange. Reuters

Let us look at the Nifty last week. The index fell for three days with one small up-day and travelled down from a high of 6,100 to a low of 6,007. But in just one day, on Friday, the index recovered to close at 6,074. This clearly shows that the bulls are in control. It took many days for sellers to bring the price down and just one day for the buyers to take the price up again.

Bulls can continue to stay long and aim for the target (between 6,145 and 6,181) shown by the blue horizontal lines on the chart. For the Sensex, the upside targets are between 20,472 and 20,670.

Bank Nifty: Money is the lifeblood of the economy and banks are the custodians of money. So as the Nifty is doing its thing of slow climbing towards the next resistance level, we thought we'd take a look a Bank Nifty index. (Click here for the chart)

The banking index is more or less tracking the Nifty in the most recent rally since January 2012 and is consolidating near resistance at 12,820. This resistance level is shown by a single horizontal line. The index briefly went above that level to go a little higher to 12,900 only to fall again. Last week the index did make a topping candle with a long tail and small body at the bottom, which is commonly known as the dragon fly. This candle can start a bearish trend if the index closes below 12,500.

However, if the index closes above 12,900 it can go to the next resistance zone higher, indicated by the two horizontal lines (12,243 to 12,325).

Remember that from a very long term perspective, the bank index is stronger than the Sensex and the Nifty. While the Sensex and Nifty have not crossed their 2008 highs, the banking index has. The 2008 high of the banking index was around 10, 775 and it closed at 12,693 on Friday.

This essentially means that if the Sensex, Nifty and Bank Nifty break to new all-time highs, the banking index and stocks will have a relatively stronger run than the broad market indexes.

George Albert is Editor www.capturetrends.com

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