Nifty and Defty charts: a mid-week update

Nifty chart

After a bullish high volume ‘gap up’ break out last Friday (Jun 29 ‘12) above the 200 day EMA and the support-resistance level of 5175, Nifty has made laboured upward progress this week. Volumes have been quite good, so why the slow progress?

Two reasons. Note that three of the four technical indicators – ROC, RSI, slow stochastic – have touched lower tops as the Nifty has moved higher. Negative divergences have acted as a brake, and may cause a pullback towards the 5175 level. While FIIs have been net buyers, DIIs have been net sellers. That has also acted as a brake.

The 20 day EMA has moved up to touch the 200 day EMA. A cross above will be a short-term positive. The 50 day EMA is forming a bullish rounding-bottom pattern. A ‘golden cross’ above the 200 day EMA will technically confirm a return to a bull market. For bulls to regain complete control, Nifty has to move above its Feb ‘12 top of 5630.

Technical indicators are bullish. MACD is rising above its signal line in positive territory. ROC is positive and above its 10 day MA. Both RSI and slow stochastic are in their overbought zones. Any pullback will be an entry opportunity.

Defty chart

The one year bar chart pattern of Defty (Nifty measured in US Dollars) is showing a stronger up move than the Nifty. How come? Because the Indian Rupee has gained against the US Dollar over the past few days, thanks partly to FII buying.

Why are FIIs buying? They are probably relieved that the fear of a Eurozone break-up has proved unfounded. Plus, the positive statements coming out of the Finance Ministry after the change of guard has improved market sentiments.

Technical indicators have turned bullish. MACD is rising above its signal line in positive territory. ROC has moved up sharply above its 10 day MA. But such a sharp move usually heralds a correction. RSI and slow stochastic are inside their overbought levels. A test of the falling 200 day EMA is likely.

Remember that the Defty is technically in a bear market, as it is trading below its falling 200 day EMA. Both the 20 day and 50 day EMAs are also trading below the 200 day EMA. Some profit booking can be expected at any time.

If the positive statements from the Finance Ministry do not turn into concrete action soon, FIIs may lose their patience and go elsewhere. Stock markets in countries like Turkey and Phillippines have outperformed India in the first six months.

Stick to the best stocks in the large-cap space for now. The time for mid-cap and small-cap stocks has not arrived yet.