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Wednesday, September 12, 2012

Nifty and Defty charts: a mid-week update

Nifty chart

Nifty_Sep1212

The Nifty index bounced up smartly from the blue uptrend line and the support zone between 5200 and 5250. Rising volumes indicate bullishness. All three EMAs are moving up and the index is trading above them. Despite the economic slowdown – evident from the disappointing IIP number - and policy paralysis in India, a rush of liquidity from FIIs has propelled the Nifty into a bull market.

There may be some hesitation as the Nifty approaches the zone between 5450 and 5500, where it had made previous tops in Aug ‘12 and Mar ‘12. Remember that resistances during an up move are usually provided by previous bottoms – not tops. Any profit booking in the 5450-5500 zone will be an entry opportunity. Strong resistance is expected only at 5700. That means the Feb ‘12 top of 5630 may get crossed during the current up move.

Technical indicators are looking quite bullish. MACD bounced off the ‘0’ line and has crossed above its signal line. ROC has moved above its 10 day MA into positive territory. RSI has risen above its 50% level. Slow stochastic has climbed sharply to enter its overbought zone. The rally should continue, with occasional profit booking.

RBI is unlikely to tinker with interest rates, as inflation is still quite high. The government is slowly coming around to the idea that some unpopular decisions may need to be taken to reduce the fiscal and current account deficits. So far, they haven’t walked the talk. The stock market seems to have anticipated that government’s hands may be forced by the economic situation.

Defty chart

S&P CNX Defty_Sep1212

In previous week’s technical update, following remarks were made about the daily bar chart pattern of Defty: “If the support from the uptrend line holds, Defty is likely to cross above its 200 day EMA during the next up move.”

The uptrend line provided excellent support. Defty bounced up above its 20 day and 50 day EMAs and looks all set to cross above its 200 day EMA. However, a bull market will be technically confirmed only when the 50 day EMA crosses above the 200 day EMA. Even then, it is unlikely to be a runaway bull market.

Technical indicators have turned bullish. MACD has bounced up from its ‘0’ line and just crossed above its signal line. ROC has entered the positive zone above its 10 day MA. RSI has moved above its 50% level. Slow stochastic has entered its overbought zone.

This is not the time to chase after unknown or beaten-down or ‘cheap’ mid-cap or small-cap stocks. Look at well-known and established blue-chip stocks from the large-cap or mid-cap universe, even if their valuations do not appear that attractive. The market always values the better stocks at a premium.

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