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Wednesday, December 5, 2012

Nifty and Defty charts: a mid-week technical update

Nifty chart


The daily bar chart pattern of Nifty is trading inside the long-term resistance zone between 5750 and 5950, and seems to be hesitating just below the upper edge of the resistance zone.

The index has also been trading inside an upward-sloping channel (marked by blue parallel lines) for a year. It is in the early stages of a new bull market. All three EMAs are rising and the index is trading above them.

Daily technical indicators are bullish, but looking a bit overbought. MACD is rising sharply above its signal line in positive territory, but hasn’t reached its overbought zone yet. ROC has climbed above its 10 day MA in positive territory, and is just below its overbought zone. Both RSI and slow stochastic have entered their respective overbought zones.

Note that Nifty touched a new 52 week high today, but none of the indicators touched new highs. The combined negative divergences could lead to some profit booking that may push the index down towards the lower edge of the resistance zone at 5750.

Can the index fall below 5750? Not impossible, but unlikely. Why? Because the break out above the 5750 level last week was accompanied by a spurt in volumes. That is usually an indication that the 5750 level may turn into a strong support.

The Lok Sabha voted today in favour of FDI in multi-brand retail after an acrimonious debate for the last 2 days. That could be a positive trigger for the index to breach the 5950 level and move towards the upper edge of the upward-sloping channel.

Defty chart

S&P CNX Defty_Dec0512

What was a sideways consolidation in the Nifty chart above (after the ‘flash crash’ of Oct 5 ‘12), became a correction on the CNX Defty chart (Nifty calculated in US Dollars).

The index found good support from its 200 day EMA, and partly filled the ‘gap’ formed above the 200 day EMA in Sep ‘12. (The one-day ‘flash crash’, which only occurred on the Nifty and Defty charts but not on the Sensex chart, will be ignored for technical analysis purposes.)

Daily technical indicators are bullish. MACD has risen above its signal line into positive territory. ROC is also positive, and above its 10 day MA, but its upward momentum is slowing. RSI has reached the edge of its overbought zone. Slow stochastic has entered its overbought zone.

There is a notable difference between the Defty and Nifty charts. The Defty has not touched a new high, so there is no negative divergences visible in the technical indicators. The index may move up to test its Oct ‘12 top of 3917.

(Note: The Nifty has gained more than 30% since its Dec ‘12 low of 4531. Has your portfolio matched Nifty’s gains? No? Write to me for a FREE preliminary review of your portfolio.)

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