NSE Nifty Index Chart Pattern – Oct 08, ‘10

The NSE Nifty index chart pattern touched a new high of 6223 intra-day on Wed. Oct 6 ‘10. The index had earlier touched 6222 on Mon. Oct 4 ‘10. This doesn’t count as a double-top because they occurred so close to each other.

The negative divergences in the technical indicators, the widening gap between the 50 day and 200 day EMAs and the volume action last week had given warning signs of an impending correction. It was no great surprise that the Nifty lost ground on the last two days of the week.

In spite of the heavy volumes on the two down days, the index got support at the top of the narrow trading range from which it had broken out last Friday (Oct 1 ‘10). Let us look at the 6 months bar chart pattern of the NSE Nifty index to assess this week’s trading:  

The technical indicators have turned weaker, though they have not turned bearish yet. The MACD is positive, but has slipped below the signal line. The RSI and slow stochastic has dipped below their overbought zones. The MFI has fallen below the 50% level, and may be hinting at a continuation of the correction next week.

The point of interest is that the FIIs remained net buyers through the week. It is the heavy selling by the DIIs that caused the dip in the index. Much of the DII selling is the result of redemption pressure from individual investors taking profits off the table. Many still remember the devastation to their portfolios caused by the 2008 bear market.

The Nifty 50 got support from the top of the narrow trading range today, and there is a possibility of a bounce up next week. For that to happen, FII buying has to pick up. The recent strictures on FII trading by SEBI may have slowed down their bullish fervour a bit. The hurdle of this week’s top of 6223 needs to be overcome.

Downside supports are likely at 5990 (20 day EMA), 5932 (lower edge of the narrow trading range), 5760 (50 day EMA) and 5550 (top of the year-long consolidation range). The India growth story has now received worldwide investor attention, so there is little chance of a big crash like the one in 2008.

The Government is thinking of allowing Foreign Direct Investment (FDI) in multi-product retail business, which will be a huge plus for attracting investments and employment for the massive number of less-skilled youth of the country. Another plus would be allowing individual overseas investors to buy Indian stocks.

But the biggest plus of all, at least in the short term, will be QE2 (Quantitative Easing, Part 2 – which means another round of printing dollars and euros to revive the ailing western economies). Much of that newly printed cash is likely to make a beeline for emerging market stocks.

Bottomline? The chart pattern of the NSE Nifty index is taking a much needed breather after a break out. A pullback to the 5550 level will restore the overall health of the market, and prime it for a push past the all-time high of 6357. Stay invested as per your asset allocation plan. Reallocate as required. Get rid of junk. Book some partial profits. Buy only if you find compelling value – not otherwise.