Nifty and Defty charts: mid-week technical update

Nifty chart

The daily bar chart of Nifty touched a 2 year intra-day high of 6101 on Jan 22, ‘13 but it turned out to be a ‘reversal day’ (higher high, lower close). Not all ‘reversal days’ lead to corrections or trend reversals. A sharp rise in volumes on a ‘reversal day’ is usually an indication that a correction or trend reversal may follow.

For the past 2 months, after crossing above the 5750 level into the ‘resistance zone’ with a volume spurt, the Nifty has traded above all three rising EMAs, and received support from its 20 day EMA. After some hesitation near the top of the resistance zone (5950 level), the index has been gradually moving up towards the upper edge of the blue parallel channel (at about 6200).

The bull market is progressing well. However, all four daily technical indicators are showing negative divergences by failing to touch new highs. That is probably hinting at some consolidation or correction. The correction is not expected to be steep – at worst the index can drop inside the resistance zone.

Q3 results of Infosys, ITC, RIL were positive surprises. HUL results disappointed the market – and has provided an opportunity for entering at lower levels.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) has formed a bullish pattern of higher tops and higher bottoms by crossing its Oct ‘12 intra-day high. It is getting ready to cross its Feb ‘12 top of 3967. The blue uptrend line has not been tested since the ‘flash crash’ on Oct 5 ‘12.

All three EMAs are rising and the Defty is trading above them. The bulls are clearly regaining control. However, daily technical indicators are showing negative divergences by failing to move above their Oct ‘12 levels. Some consolidation or correction can be expected.

As long as FIIs remain net buyers, there is little chance of a big correction despite heavy selling by DIIs. RBI’s interest rate policy announcement later in the month and the Union Budget next month may act as triggers for the next moves in the index.