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Wednesday, November 23, 2011

A mid-week update on the Nifty chart pattern

There is some good news and some bad news. Let us start with the good news first.

The Nifty dropped to an intra-day low of 4641, but bounced up from the support of the lower edge of the blue downward sloping channel. A drop below the channel – which would have opened up the possibility of a vertical fall – has been prevented by the bulls.

At the day’s close at 4706, the Nifty climbed above the crucial 4700 support level. Why crucial? Because it corresponds with tops made in Apr ‘09 and Jun ‘09 (marked by down arrows). Previous tops tend to act as supports – as marked by the up arrows (in Feb ‘10, Aug ‘11, Oct ‘11).

The RSI and the slow stochastic have dropped deep inside their oversold zones. The probability of an upward bounce has increased. Whether the bounce turns into a full-fledged rally, like the one we witnessed in Oct ‘11, is questionable.

Nifty_Nov2311

Now, the bad news. This is what I wrote in last Sunday’s post:

“The support level of 4700 is likely to be tested and broken soon. In case the index bounces up from 4700, use it as a selling opportunity.”

The 4700 level was broken on an intra-day basis, but not on a closing basis. Technically, the support has held. But the Nifty has made its intentions clear – it wants to fall lower. Since the channel has not been breached yet, we will hope for a gradual fall within the downward-sloping channel. But, be prepared for a sudden, sharp fall below the channel.

All four technical indicators are looking bearish, to the point of being oversold. While the index can remain oversold for some time, the positive divergence in the MACD – which did not fall to a lower bottom with the index – is signalling a bounce up. The positive divergence is not supported by the other three indicators; any bounce up may be short-lived and provide a shorting opportunity to the bears.

Take a look at the volume bars, on which a 14 day MA has been superimposed to smoothen out the ‘noise’. Note that during the rally in Oct ‘11, the Volume MA was falling, but during Nov ‘11 correction the Volume MA has been rising. This is a contrary indication, as volumes are supposed to go up during rallies and come down during corrections. Not a great sign for the bulls.

Last, but not the least, is that all three EMAs are moving down and the index is trading well below them. Also, look at the bearish rounding-top pattern being formed by the 200 day EMA. These are clear signals that the bears are dominating, and any rallies will be selling opportunities.

How low can the Nifty go? In a post written exactly three months back, I had mentioned the probable Fibonacci retracement levels on the Nifty chart. If you missed that post, please go through it. The link is given below.

Related Post

About Nifty Fibonacci retracement levels

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