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Wednesday, November 7, 2012

Nifty and Defty charts: mid-week technical update

Nifty chart

Nifty_Nov0712

The daily bar chart pattern of Nifty has been consolidating within a rectangular band of about 100 points since the ‘flash crash’ a month back. Rectangular patterns are unpredictable because an eventual break out from the pattern can occur in either direction.

Last week’s downward break – following RBI’s policy announcement – proved to be a ‘false’ break out. Why? Because the break out wasn’t confirmed since the index failed to close more than 3% below the support level of around 5630. The 3% ‘whipsaw’ rule takes care of such situations – i.e. you avoid a ‘whipsaw’ by not taking any action.

Today (Nov 7 ‘12), the index has broken out above the rectangle on good volume support. That gives credibility to the upward break out. But again, the 3% ‘whipsaw’ rule becomes applicable. That means, the Nifty needs to close above 5900 for the upward break out to be technically valid.

Should one wait for 5900 to be crossed to enter? Won’t that mean losing more than 100 points of rally? It depends one one’s risk tolerance and skills. The ‘false’ break out last week, followed by a ‘gap’ up move above the 20 day EMA, provided an entry point. Today’s break out was another entry point.

If you missed both, you can wait for a pullback to the top of the rectangle and then enter on the subsequent upward bounce. Whatever you do, keep a stop-loss. Note that Nifty is in an up trend in a bull market. So, all dips can be used as entry points.

Defty chart

S&P CNX Defty_Nov0712

The daily bar chart pattern of CNX Defty (Nifty calculated in US Dollars) clearly shows an uptrend in a nascent bull market. The ‘flash crash’ found support on the blue uptrend line. The subsequent correction got good support from the rising 50 day EMA.

Note that the ‘gap’, formed on the chart in Sep ‘12 when Defty moved above its 200 day EMA, was filled by the ‘flash crash’. ‘Gaps’ typically get filled. Some times they get partly filled. Either way, the previous move before the ‘gap’ usually continues. On rare occasions, ‘gaps’ don’t get filled at all. Then they tend to become strong resistances to future down moves.

Technical indicators are about to turn bullish. MACD is below its signal line but has managed to remain in positive territory, and showing signs of moving up. ROC has crossed above its 10 day MA and about to enter positive territory. Both RSI and slow stochastic are rising towards their 50% levels. Looks like the month-long correction is over.

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