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Wednesday, October 10, 2012

Nifty and Defty charts: a mid-week technical update

Nifty chart

Nifty_Oct1012

There are three things to note on the daily bar chart pattern of Nifty above:

  1. the blue uptrend line – which was breached intra-day by last Friday’s ‘flash crash’
  2. the light green oval marking a gap in the chart – which was filled by the ‘flash crash’
  3. last Friday’s ‘flash crash’ – which dropped the Nifty below all three EMAs and the uptrend line

As mentioned in last Sunday’s post about Nifty, intra-day breaches of support/resistance levels are not taken into account for technical analysis. Only convincing breaches on a closing basis are important. That hasn’t happened yet for points 1 and 2 above. So technically, the Nifty uptrend remains intact, and the gap on the Nifty chart remains unfilled.

Regarding the ‘flash crash’, five reasons were put forth why the ‘flash crash’ smells of a ‘scam’ rather than an ‘error’. If it looks like a duck and quacks like a duck, then there is very little chance that it is a mouse doing a duck impersonation!

However, the Nifty was looking a bit overbought, and has reacted after briefly entering a strong resistance zone between 5750 and 6000. It is seeking support from its 20 day EMA, and may drop some more in an effort to fill the gap. Technical indicators have corrected from overbought conditions, and beginning to look a bit bearish.

No need to sell in a panic. Since the uptrend is intact (which will be quite clear from the Defty chart below), use the correction to buy. More reforms are in the pipeline. FIIs are likely to greet that with more enthusiasm.

Defty chart

S&P CNX Defty_Oct1012

The daily bar chart pattern of CNX Defty (Nifty expressed in US Dollar terms) has an important difference from the Nifty chart above. Last Friday’s ‘flash crash’ found support – marked by an up arrow - exactly on the blue uptrend line. That should answer the question in many investors’ minds about who bought when the Nifty had tanked by 900 points.

The two other points worth noting are the ‘golden cross’ of the 50 day EMA above the 200 day EMA last week, technically confirming a return to a bull market; and, the gap formed on the Defty chart (marked by light green oval) when the index crossed above its 200 day EMA.

A break out with a gap is supposed to be stronger than a break out without a gap. That means, the gap should act as a strong resistance to future down moves.

Technical indicators are beginning to look bearish – so the correction may continue a bit longer. On the downside, support can be expected from the rising 50 day EMA and the gap.

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