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Wednesday, September 5, 2012

Nifty and Defty charts: a mid-week technical update

Nifty chart

Nifty_Sep0512

In last week’s update, the importance of the support zone between 5200 and 5250 was explained. At today’s close, the Nifty index has taken support at the blue uptrend line - exactly in the middle of the support zone. Combined support from the 200 day EMA and the 5200 level is expected in case the uptrend line is breached.

A convincing breach of the 5200 level and a drop below the Jul ‘12 low of 5032 would mean the end of the intermediate uptrend that started from the Jun ‘12 low of 4770. Will the Nifty bounce up from the support zone? Or, will it start a down trend?

Bearish technical indicators are pointing to a continuation of the correction. MACD is falling below its signal line, and about to enter negative territory. ROC is below its 10 day MA, and falling deeper into negative territory. RSI has dropped to the edge of its oversold zone. Slow stochastic is inside its oversold zone. Except for MACD, the other three indicators are looking oversold. So, an upward bounce can occur at any time.

RBI has maintained status quo on interest rates for the past few months, but banks have started to pare their lending rates. The marginally higher GDP figure for Q1 is another indication that the economy may be bottoming out. The current dip can be used to buy the shares of fundamentally strong, low debt companies – but with appropriate stop-losses in case the uptrend comes to an end.

Defty chart

S&P CNX Defty_Sep0512

The daily bar chart pattern of Defty (Nifty calculated in US Dollar terms) is in a bear market, as it is trading below all three EMAs. However, the blue uptrend line connecting the Jun and Jul ‘12 bottoms hasn’t been tested yet. If the support from the uptrend line holds, Defty is likely to cross above its 200 day EMA during the next up move.

Technical indicators are looking bearish, to the point of being oversold. MACD is falling below its signal line, and ready to enter the negative zone. ROC is negative, and falling below its 10 day MA. RSI is just above its oversold zone. Slow stochastic is inside its oversold zone.

The stalemate between the UPA and BJP continues in Parliament – a case of the pot calling the kettle black! With just a couple of days left for the Monsoon Session, there is very little chance of any important bills getting passed. The shocking sight of MPs indulging in fisticuffs in the upper house shows that India is far away from earning a place among global leaders.

In spite of the pathetic state of our political leadership, some companies will continue to thrive because of their innovative managements and strong product/service portfolios. When there is uncertainty and gloom all around, a contrarian approach can reap rich dividends.

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