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India Stocks at Start of Long-Term Downtrend?

India's stock markets have taken a beating this month, after chalking decent gains in 2010. The 25 basis points rate hike by the Reserve Bank of India on Tuesday didn't help sentiment either. The seventh consecutive rate increase is stoking fears that the tightening could hamper economic growth.

So has the market's upward momentum been derailed? And is the change in direction long term or is it just a bump on the track?

A look at the benchmark Sensex's chart show two features which suggest a temporary derailment.

The first is the way the Sensex has pulled back strongly away from the previous high near 21,000. This has created a long term double top pattern. The first top is in January 2008 and the second in November 2010. The higher technical target near 21,500 was not achieved in the recent rally. The market has retracted in a big way and fallen below the previous technical support level near 19,500. This sets a lower downside target near 17,500.

The second feature is a weak head-and-shoulder pattern. This is shown as A, B and C. The downside projection for this is a little lower near 17,40. This gives a confirmation target for the retreat using two different analysis methods.

The head and shoulder pattern is invalidated if the market is able to rally and close above 20,500.

Both of these targets are below the lower edge of the long term GMMA near 18,500. In previous retreats the lower edge of the long term Guppy Multiple Moving Average has acted as a support level. The market has rebounded from this area and the long term group of averages indicate the level of investors support. Wide separation also shows good investor support for the trend. The long term GMMA is currently well separated suggesting investors are buyers at points of price weakness. A fall below 18,500 suggests a significant change in the trend and again is a confirmation of the head and shoulder downside projection targets.

This market condition requires caution. Traders will already have taken profits as major stocks developed similar end of trend patterns. Full confirmation of a major trend reversal comes when the long term GMMA compresses. Until this develops the retreat can be seen as a technical retracement prior to a continuation of the uptrend. On current development this is a temporary derailment rather than a change in direction.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

Asia Economy