Nifty 50 update – downtrend broken, but a hurdle remains

The two months long downtrend in the Nifty 50 index has been reversed technically. The index has broken out of the downward sloping channel within which it has been trading, and has overcome the combined resistance from the 20 day and 50 day EMAs. But all is not well yet.

The short-term Nifty 50 bar chart pattern will reveal a few concerns and at least one important technical hurdle that the bulls need to overcome:

The first concern is the volume. An upward break out from a correction or consolidation pattern should be accompanied by a surge in volumes. That hasn’t happened – which keeps the door ajar for a ‘false break’ and a drop back into the downward sloping channel.

The second concern is that the FIIs are still net sellers in the market. The DIIs have been net buyers. Unless the FIIs resume their buying, new highs may not be reached in a hurry. That may not happen till the middle of Jan ‘11 when Q3 results will also start hitting the market.

The next concerns are the state of three of the four technical indicators. The MACD has moved above its signal line, but hasn’t yet moved into positive territory. The ROC is touching its 10 day MA and the ‘0’ line and hasn’t entered positive territory either. The RSI is above its 50% level, but didn’t rise higher with the index. Only the slow stochastic is looking bullish.

The Nifty 50 reached its previous intra-day high of 6069 on Dec 6 ‘10. Till that hurdle is crossed convincingly, a bullish pattern of higher tops and higher bottoms will not get formed. There is every possibility that the index may spend some time consolidating, before resuming the up move in earnest.

Just to put things in perspective, both the 100 day and 200 day EMAs are rising with the index moving up above them. That is the sign of a bull market. What the Nifty 50 experienced for the last two months was a very normal 10% correction from the peak of 6338 (touched on Nov 5 ‘10) to the trough of 5690 (touched on Nov 26 ‘10).

Such corrections are needed periodically to get rid of some of the excesses that were becoming increasingly visible, with questionable companies that changed their names and started shooting up like rockets, and investors’ in-boxes getting flooded with emails and messages touting ‘sure-shot’ small-caps.

Note that some fundamentally strong stocks have recovered quickly and have started to outperform the Nifty 50. Tata Steel comes to mind. A few other big names should start leading the next leg of the rally. Bet on proven performers and stay away from less known stocks that are looking ‘cheap’.