A mid-week Nifty update

Three important trigger events – state election results, RBI’s policy review and the budget - which were supposed to give a new direction to Nifty’s chart pattern failed to make much impression on the stock market.

Election results were mildly negative for the market – since the Congress was expected to do better. RBI’s policy review was a non-event because a CRR cut was announced earlier and interest rate cut was kept in abeyance. The budget was mildly positive in a roundabout way – there were no negative surprises.

The next trigger will be India Inc’s Q4 results, which should start hitting the market in another three weeks. Those are not likely to be a big improvement over Q3 results. Till then, global liquidity flows will rule the Indian market.

The Nifty daily bar chart is showing the effect of indecision among market players:

The down trend line that dominated the Nifty chart for more than a year was breached in Feb ‘12, followed by a pullback towards the down trend line. Such pullbacks are quite common after breach of support-resistance levels and can be opportunities for selling or buying.

Note that at its recent intermediate top at 5630, the Nifty gained more than 20% from its Dec ‘11 low of 4531, and retraced more than 50% of its fall from the Nov ‘10 peak of 6338. The index is trading above its 200 day EMA, and the ‘golden cross’ of the 50 day EMA above the 200 day EMA has confirmed a return to a bull market. All four technical criteria that determine a bull market have been met.

The index is consolidating within a symmetrical triangle, which is usually a continuation pattern. That implies that the break out from the triangle should be upwards. When will the break out occur? In the very near future. Remember that triangles can be unreliable – so await the break out before deciding to plunge in with both feet.

The technical indicators are showing signs of bullishness. The MACD is below its signal line and barely positive. The ROC has bounced up from its 10 day MA into positive territory. The RSI has risen to its 50% level. The slow stochastic is below its 50% level, but moving up.

The FIIs have been net buyers since the rally began three months ago. Selling by the DIIs have not been able to change the technical picture. This is a good time to rejig your portfolio by bailing out of the poor performers.

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