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Wednesday, August 1, 2012

Nifty and Defty charts: a mid-week update

Nifty chart

Nifty_Aug0112

In last Saturday’s post, it was observed that the three EMAs had come close to each other and the following comments were made: “A sharp move usually follows. The only way for the move to be upwards is if FIIs start buying in huge volumes. Possible, but unlikely. So, brace yourself for a sharp down move at any time.” 

The unlikely seems to have happened. FIIs turned huge net buyers. DII selling could not prevent the Nifty from climbing above all three EMAs into bull territory. So, is it time to buy? Not yet, because the rally has been accompanied by sliding volumes. The technical indicators are also not very bullish. MACD is barely positive, and touching its signal line. ROC crossed above its 10 day MA into positive territory, only to turn down. RSI has just reached its 50% level. Slow stochastic has risen sharply to the edge of its overbought zone.

Nifty is consolidating within a large ‘symmetrical triangle’ pattern since touching its Dec ‘11 low. Triangles are notorious for being unreliable, because the eventual break out can be in either direction. The index is close to the upper edge of the triangle. An upward break out supported by strong volumes can change the trend to a bullish one.

But there is nothing to be bullish about as far as the economy is concerned. RBI Governor has lowered his GDP growth forecast for 2012-13 and expects inflation to move up. That means no interest rate cuts in the near term. FIIs (or is it round-tripping of very dark-coloured money from India?) may be setting up a bull trap. Be prepared for a sharp down move if the Nifty finds resistance from the upper edge of the triangle.

Defty chart

S&P CNX Defty_Aug0112

Unlike the Nifty, which has been moving in and out of bull territory in 2012, Defty remains in a bear market and continues to trade below its falling 200 day EMA. The index has managed to climb above its entangled 20 day and 50 day EMAs, but has a lot of ground to cover before testing its 200 day EMA. The support level of 2960 should be closely watched. A drop below will be very bearish.

Technical indicators are looking mildly bullish. MACD is barely positive, and touching its signal line. ROC has crossed above its 10 day MA and trying to enter the positive zone. RSI has risen to its 50% level. Slow stochastic has moved above its 50% level.

The rally may continue for a couple of more days, but is expected to face resistance from the 200 day EMA, if it doesn’t fizzle out sooner. Market players became enthusiastic when the PM took charge of the Finance Ministry. But nothing of note happened. Now there is excitement that Chidambaram as Finance Minister may announce some market-friendly policies. I’m not a betting man, but if I was, I would keep my wallet in my pocket.

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