Charting Asia

India Stocks: Where is Asia's Top-Performer in 2009 Headed in 2010?

After a terrible 2008, Indian stock markets came roaring back to life in 2009.

Foreign investors that roamed the globe armed with cash and in search of higher returns loaded onto Indian stocks, helping the benchmark BSE Sensex gain 81% for the year, making India the best-performing stock market in Asia; and the third in the world, after Russia and Brazil.

But as we enter 2010, with stocks becoming more expensive, and inflationary fears and asset bubbles forming in parts of the global economy, where are India markets headed?

A technical assessment of India's charts suggest there may be more upside to come, but not without risks.

The Sensex developed a sharp double bottom rebound and an exceptionally strong trend in 2009. The key feature of the Sensex is the development of an historical resistance level near 17,500. This is the upper area of a trading band. A trading band is a horizontal consolidation area that signals a pause in the trend. Sometimes it is an end-of-trend signal.

The lower edge of this trading band is located near 15,500. This is a weak support area that has no strong historical basis. When we look at the 15,500 level in longer term Sensex charts this level does not act as a significant support or resistance level. However, it broadly defines the upper edge of the previous consolidation period in the 2009 rising trend. It is important because this is used to project upside targets for the Sensex.

The width of the trading band is measured, and this value is projected upwards to give the initial targets for any breakout and trend continuation. The upside target is 19,500.

However this consolidation level near 15,500 is weak. The strongest historical support level is lower near 14,500. This increases the width of the trading band. If this wider trading band is measured, and the value projected upwards it gives a longer term target near 20,500.

The location of the long term group of moving averages in the Guppy Multiple Moving Average indicator shows good trend support. The width of this group is about the same as the distance between historical support at 14,500 and recent consolidation support at 15,500. This suggests a strong and sustainable uptrend.

However this trend can still develop correction behaviour. This trend correction has a high probability of correcting using time. This means the market moving sideways for several weeks until it encounters the support provided by the long term GMMA. An extended period of consolidation provides a firmer base for a strong up trend continuation.

A  sustainable breakout above 17500 in the next week or so develops a faster moving momentum trend with a rapid move towards 19,500. This is a good trading trend, but the momentum in the longer term is unsustainable. This increases the probability of volatile trend corrections.

The general outlook is bullish, but it is the nature of the trend continuation which is most important. A strong resistance near 17500 signals a more stable trend development.  A fast moving breakout above 17,500 leads the way for a profitable trading environment with a closer eye on risk management.

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