Nifty and Defty charts: a mid-week update

Nifty chart

Hopes of an interest rate cut or at least a CRR cut by RBI pushed the Nifty above the twin resistances of its 200 day EMA and the 5175 level (that has acted as a support-resistance line for the past 5 months) on Monday, June 18. But with RBI keeping rates unchanged, it was a brief intra-day breach followed by a drop to the 50 day EMA.

A ‘reversal day’ pattern (higher high, lower close) got formed, probably marking the end of the June rally. Note that such a pattern can also form in the midst of a rally – as it did on Jun 11, and was accompanied by higher volumes. So, one needs to wait for a few more days to conclude that the current rally is over.

Volumes on up-days have been good, but are touching lower peaks. Note the difference in volume pattern during Jan ‘12, when up-day volume peaks were supporting the rally by rising higher.

Technical indicators are bullish but showing signs of weakness. MACD is positive and above its signal line, but the histogram is falling. ROC is also positive, but touched a lower top and dropped below its 10 day MA. RSI is rising towards its overbought zone, but touched a lower top as the Nifty rose higher. Slow stochastic has slipped below its overbought zone and also touched a lower top. Negative divergences in three of the four indicators may end the rally soon.

However, bullish rounding-bottom patterns are visible on the 20 day EMA and the MACD signal line. That means the rally may continue for a few more days. Such contradictory signals emanate when the Nifty trades within a broad range (between 4750 and 5630 for the past 5 months).

Nifty is once again testing resistance from its 200 day EMA. Only a move above Monday’s intra-day high of 5190 will keep the bullish pattern of higher tops and higher bottoms intact.

Defty chart

CNX Defty (Nifty measured in US Dollars – hence more relevant for FIIs) twice tested support from the 2960 level and crossed above its falling 20 day EMA on Jun 6 ‘12. For the next 10 trading sessions, it has bounced around between its rising 20 day EMA and falling 50 day EMA. Unlike Nifty, Defty is trading well below its 200 day EMA, and is clearly in a bear market.

Technical indicators are looking bullish, which means the sideways consolidation with a slight upward bias may continue a bit longer. MACD is just below its ‘0’ line in negative territory, but above its signal line. ROC has crossed below its 10 day MA. RSI is above its 50% level, and trying to move up. Slow stochastic has fallen below its overbought zone, and sliding down.

After the disappointment of RBI’s status quo policy, it seems like Nifty and Defty are waiting for a positive trigger from the US Fed in the form of a QE3, which could propel global stock markets upward on another liquidity surge. The more likely outcome is an extension of the ongoing ‘Operation Twist’.

Hold on to your portfolios. No need to take precipitate action.