A mid-week Nifty chart update

The ‘reversal day’ pattern (lower low, higher close) on the Nifty chart last Friday (May 18 ‘12) was not accompanied by a volume surge. That was an indication that the ‘reversal day’ was unlikely to mark the end of the current down move, and any upward bounce due to the oversold technical indicators was going to be a short and weak one.

Some times charts play out as per expectation. There was a brief bounce up towards the blue down trend line, but bullish energy petered out after the Nifty crossed the 4950 level on intra-day basis yesterday. The down move has resumed.

The technical indicators have corrected oversold conditions a bit. Any upward move is going to face resistance from the falling 20 day EMA and the down trend line. Can the Nifty fall lower to test the Dec ‘11 low? The probability is high, and the main culprit will be the weakening Rupee. The chart below will explain why.

The S&P CNX Defty chart is the Nifty measured in US Dollars. Why should we look at it? Because the Nifty dances to the tune of FII cash flows, and FIIs look at this chart to decide their buying and selling.

The Defty chart shows two important points of difference from the Nifty chart:

1. The rally from the low of Dec ‘11 to the intermediate top of Feb ‘12 crossed above all three EMAs, but failed to even test the blue down trend line – let alone cross above it; the 50 day EMA came close to the 200 day EMA, but the ‘golden cross’ above the 200 day EMA failed to occur - so it was just a bear market rally.
2. The Defty is already testing its Dec ‘11 low and may break down lower to test its Jul ‘09 low (the corresponding Nifty level is about 4000); the bearish technical indicators are suggesting the possibility.

This is not the right time for bottom fishing. It won’t be, as long as the Rupee keeps weakening against the Dollar. Regular investments from monthly savings should not be stopped however.