Bank Nifty : Reversal of Trend?

After the recent steep correction and a V shaped recovery in the Indian markets, talks of breaching the recent top of 5182 have resurfaced. I have started hearing 5250 as the next target and many "analysts" are finding hope in the recent Dow's movements which has taken it to new highs of the calendar year. I am sure these analysts are aware that different markets around the world "Top" at different time but choosing to ignore.

As of this bear market and recovery, China is the leading market having bottomed first and most probably even topped first. Indian markets are bit behind if we consider recent highs to hold, and in that case US markets are the laggards.

This aspect even works for different sectors in same markets. So for Indian markets we can say that the Telecom sector may have topped first, though we don't have any Index to follow that and may be even Realty. Its always a great place to be in if we identify a sector which is leading the overall market. Finding technical reasons to identify "Tops" and "Bottoms" in it can give us huge advantage in betting on other sectors that are playing catch up as we know how they are going to behave.

Lets take a look at the Bank Nifty which after having a phenomenal run has shown signs of exhaustion. Take a look at the "trend-arc" which initially was rising at a nominal slope, started rising almost vertically. Obviously this was not sustainable and it had to give way at some point. We see a break from the trend and now it is struggling to even attain those levels. This is a clear sign of buyers becoming reluctant. If we take a look back crude oil also made a rising arc before getting reversed and it seems that gold is currently doing the same.

Now lets have a look at the bottom panel of Mass Index, which I have hardly seen being used by many. What this Index most accurately does is predict reversals. (You can google to get the theory and calculations behind it.) The criteria for Mass Index to indicate possible reversals are:

1. The Mass Index going above 27 (red line) and then falling below 26.5 (blue line)

2. 9 day EMA line point upwards, (if it points downwards with above condition met, a reversal on the upside is possible)

We clearly see the above conditions being met, so we can safely assign a higher probablity to the reversal, than this to be a false alarm. Fundamentally as well Banks are not in a very great position, with Inflation rising and hike in Interests rates fears being the prime concerns. Moreover interesting this about initial phases of a reversal is that it looks like profit booking! So the stocks and sectors which have given the highest return starts the correction which is a fast paced one.

So is the Bank Nifty a tad ahead of the overall market in signalling a possible reversal? Only time will tell, but we have seen in past that how swift and "time-wise" efficient the global markets have become. If this is a reversal scenario then we will not see Bank Nifty to reach previous high though it is not far and maybe see a stronger correction in the next leg of fall.

Now the other question is if Bank Nifty has really reversed what happens to Nifty. Banking have around 17% weightage so it is quite hard to imagine Nifty going higher with such a huge part of it underperforming.

For more enthusiastic readers SBI has also given such a reversal signal among the Banks.

If you take me seriously consider shorting it !!