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Friday, October 1, 2010

NSE Nifty Index Chart Pattern – Oct 01, ‘10

In last week’s maiden analysis of the NSE Nifty index chart pattern, I had mentioned that the minimum upward target for the breakout above the 5550 level was 6150. Why minimum? When an index or stock trades within a consolidation channel for a while – a long while in our case – the target is the width of the consolidation channel added to the breakout point. In strong bull and bear markets, targets are often overshot.

Interestingly, today’s intra-day high was 6153. Our minimum target has been met. What next? Will the Nifty move up to test its all-time high of 6357 – touched intra-day on Jan 8 ‘08? For the sake of the market’s health, it better not happen right away.

Several strongly bullish events happened on Thursday, Sep 30 ‘10 and today (Friday, Oct 1 ‘10). Thursday’s closing level of 6030 was the highest monthly closing level after 33 months. The previous, and all time, highest monthly closing level was 6139 on Dec 31 ‘07. Today’s closing level of 6143 was the highest weekly closing level since Jan 11 ‘08 and the highest daily closing level since Jan 15 ‘08. There is every possibility of the index making the final dash of 200 odd points next week.

Does it mean that the much-awaited correction isn’t going to happen? For the answer, we have to take a look at the 6 months daily bar chart pattern of the NSE Nifty index:

Nifty_Oct0110

The consolidation within a small rectangle – which started the previous week after the index touched the 6000 level - continued for four more trading sessions this week, till today’s break out. All three EMAs are moving up with the index above them – a bullish sign. But note that volumes on down days within the rectangle were higher than some of the up days. Wednesday’s (Sep 29 ‘10) down day volume was more than today’s break out day volume. A sign of distribution.

The MACD was about to cross below the signal line, which would have been bearish. Today’s bounce up could not reach a new high. The RSI has made a lower top in the overbought zone. The MFI has also made a lower top, and dropped from the overbought zone. The slow stochastic is in the overbought zone and drifting down a bit. All four indicators are showing negative divergences, pointing to a correction in the near term.

Last, but not the least, is an empirical observation about the distance between the 50 day and 200 day EMAs. Every time the 50 day EMA moves 400-500 points above the 200 day EMA, the Nifty has a correction. The current distance between the two EMAs is about 410 points. Is a correction imminent? One can never be certain with technical analysis.

However, prudence demands that investors remain cautious and nimble because the Nifty is just 200 points below its all-time high, and the technical indicators are flashing warning signals. A pullback towards the long-term trading channel would be equivalent to a 10% correction, and is always on the cards.

Food inflation continues to rise. Banks have started to hike fixed deposit rates as RBI’s credit squeeze begins to take effect. A slew of IPOs are draining away cash from the secondary market. Q2 results are two weeks away, and good results are already ‘discounted’ by the stock market. Which means any negative earnings surprises could become the trigger for a sell-off.

Bottomline? The chart pattern of the NSE Nifty index has achieved its upside target and is poised to test the all-time high. Investors should remain circumspect and book profit in stocks that have run up too fast. Fresh entry should be contemplated after the Q2 results are announced, or after a 10-15% correction, or both.

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