A mid-week technical update: Nifty and Defty charts

Nifty chart

A 130 points rise in a single day on the Nifty chart was backed by a volume spurt. Are happy days here again? Not yet, as the resistance from the blue down trend line hasn’t been convincingly breached. There is likely to be overhead resistance from the falling 50 day and 200 day EMAs.

The technical indicators are turning bullish. MACD is rising above its signal line, but remains in negative territory. ROC has climbed sharply above its 10 day MA into positive territory, but such sharp rises are rarely sustained. RSI and slow stochastic have moved above their 50% levels.

Only a move above 5630 – the top touched in Feb ‘12 – will form a bullish pattern of higher bottoms and higher tops. Till then, such a rally should be treated as a bear market rally. That means selling the rise. The Defty chart below will show that the bears are still dominant.

Defty chart

For the uninitiated, the Defty index has the same constituents as the Nifty but is measured in US Dollars. FIIs have the money-power to control index movements in the Indian stock market, and Defty is the more relevant chart from the point of view of FIIs.

Note that the Defty is deep in a bear market – well below its 200 day EMA and the blue down trend line. It is trying to find a bottom at the 2960 level (low touched on Dec 20 ‘11 – marked by the grey vertical line on the left). Can it be a ‘double-bottom’ reversal pattern?

The technical indicators are suggesting otherwise. Though all four indicators are beginning to look bullish, two of them (MACD, RSI) have touched lower bottoms and one (slow stochastic) has touched a flat bottom while the Defty touched a slightly higher bottom at 2969 (low touched on May 23 ‘12 – marked by the grey vertical line on the right). Negative divergences in three of the four indicators is a warning to bulls not to raise their hopes too high.

There is talk in the market about a likely rate cut by the RBI and a possible QE3 in the USA. But it is the situation in Europe that is hanging like a proverbial Damocles’ sword over global stock markets. Till the talk becomes reality, treat the current rally as a relief rally.