#$indl

The Indian stock market is forming a potentially long-term bullish chart pattern.

The Indian stock market has been an interesting, and potentially profitable, one to track technically over the past few years. Three years ago, in March 2014, we posted a chart noting the breakout to all-time highs in the Indian Sensex Index above a series of peaks stemming back six years. Over the next year following the breakout, the index rallied by more than 40%. Exactly 2 years ago to this day, on February 24, 2015, we noted that while the breakout to all-time highs was perhaps the beginning of a much longer-term advance, in the immediate-term, the Sensex was facing several layers of potential resistance (e.g., key Fibonacci Projections and Extensions) on the chart. Indeed, the index would top out within days and proceed to lose ¼ its value over the subsequent 12 months.

That pullback retraced 88.6% (also a Fibonacci figure) of the rally following the 2014 breakout. While we would have liked to have seen the Sensex retrace the entire rally and test the breakout point, that was not to be. Instead, a year ago, the market formed a textbook double bottom and proceeded to rally back to its former highs by September. Half of that rally was retraced over the following few months before the index formed another textbook double bottom that would launch its back towards its highs again.  That brings us to today.

While the Sensex remains just shy of its 2015 and 2016 highs, another popular Indian index has returned to essentially match the peaks of its own.  As such, the Indian Nifty 50 Index is the subject of today’s Chart Of The Day.  The impetus is the very possible interpretation of the Nifty’s chart since the 2015 peak of a cup-and-handle formation.

As we have mentioned many times, a cup-and-handle pattern is typically a very bullish one. As a refresher, a cup-&-handle pattern involves 2 parts:

The Cup (March 2015-September 2016, in this case): This phase includes an initial high on the left side of a chart followed by a relatively long retrenchment before a return to the initial high.

The Handle (September to the present): This phase involves a shorter, shallower dip in the security and subsequent recovery to the prior highs.

The bullish theory is predicated on the idea that after taking a long time for a stock to return to its initial high during the “cup” phase, the “handle” phase is much briefer and shallower. This theoretically indicates an increased eagerness on the part of investors to buy since they did not allow it to pull back nearly as long or as deep as occurred in the cup phase. Regardless of the theory, the chart pattern has often been effective in forecasting an eventual breakout and advance above the former highs.

Given the roughly 14% bounce over the past two months, a considerable pause and digestion near the highs here would be a healthy and welcomed development. Following this potential pause, should the Nifty succeed in convincingly exceeding the 2015-2016 peaks, there is no guarantee but a new, major leg of advance could be a real possibility.

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The resolution of the Indian stock market’s current test of resistance could set the stage for either a run at all-time highs, or a test of the 2014 breakout area.

On March 7, 2014, we highlighted the fact that the Indian stock market was breaking out above a 6-year series of peaks to an all-time high. It would proceed to rally more than 40% over the next 12 months. In February of last year, we noted that, based on various charting analyses, the rally in “Indian Stocks May Be In For A Breather”. Indeed, on March 4, 2015, almost exactly 1 year following the breakout, the rally ran out of gas. The Indian market would proceed to trend lower for the next 12 months before bottoming (at least in the near-term) on February 29, 2016 -- almost exactly 1 year after it peaked.

Fast forward to today and we see that the Indian stock market has bounced along with most of the global equity markets. Also like most markets, the Indian market (as represented by the Nifty 50 Index in the charts below) has reached an area on its chart containing multiple levels of potential resistance. Among others, these potential areas of resistance include:

The underside of the broken post-2009 up trendline

The post-2015 down trendline

The 200-day simple moving average

The 500-day simple moving average

A closer look:

The reaction of the Nifty at this juncture could determine whether this post-February bounce has any more legs to it -- or whether it has run its course. We never want to anticipate a breakout so the benefit of the doubt should go to the bears and this resistance holding. However, should this convergence of resistance be overcome, the bulls would quickly regain the ball.

Lastly, we do not want to overstate the importance of this current test of resistance. However, the  decision at this crossroads could set the stage for the next move of an even greater magnitude. We have mentioned a number of times the not unlikely chance that, at some point, the Indian stock market will return to test the 2014 breakout levels. There certainly is no rule that price has to test that breakout point, but these levels tend to act like a magnet, often inviting at least one test before a more durable advance.

Therefore, should the Nifty fail at current resistance, that may put a test of the breakout level in its sites. And while that may seem like a dire outcome, the breakout level is only about 5% below the February lows. So it is certainly a conceivable destination.

On the other hand, should prices surmount these areas of resistance, not only are the short-term rebound prospects enhanced, but the bigger picture improves greatly as well. We view the Indian market as being in a secular bull market and merely undergoing a post-breakout breather. It wouldn’t be a sure thing, but a breakout above resistance here may suggest that the breather is over. And in that case, an assault on the all-time highs, and beyond, may not be far behind.

For now, we’ll just take it a step at a time. A breakout above nearby resistance and the bulls have the upper hand. A failure here, and the bears still have the ball.

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Photo of Grand Trunk Road, Kolkata, India from Steve McCurry’s Blog.

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