Nifty and Defty charts: a mid-week update

Nifty chart

Negative divergences visible in all four daily technical indicators two weeks back had led to the conclusion that Nifty will drop back inside the long-term resistance zone between 5750 and 5950. But it appears that the Nifty is trying to turn the resistance zone into a support zone – as it is already trying to climb above the 5950 level (it did so intra-day, but not yet on a closing basis).

Bulls should be enthused by the facts that the index is trading above its rising 200 day EMA, and the daily technical indicators are correcting from oversold conditions. Bears will point out that trading volumes have slipped and the index may be in the process of forming a head-and-shoulders reversal pattern (of which, the ‘left shoulder’ and ‘head’ has already formed).

However, the size and duration of the head-and-shoulders pattern (if it does form eventually – there is no guarantee that it will) implies that the subsequent correction is unlikely to be huge. At worst, it may drop below the 200 day EMA and test the Nov ‘12 low. The more likely outcome, in case of the correction continuing, is a drop to 5750 (the lower edge of the resistance zone, which should provide strong support).

Despite dire warnings of a big crash from some Elliott Wave analysts, the correction during the last few days appears more like a bull market correction that is an opportunity to add.

Defty chart

Two weeks back, the following comments were made: “The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) has formed a bullish ‘ascending triangle’ pattern from which the likely break out is upwards… Some more correction can’t be ruled out. If the 50 day EMA fails to provide downside support, expect stronger support from the rising 200 day EMA…”

The Defty chart did drop below its 50 day EMA for a few days, but is trying to move back above it. The index is trading above its rising 200 day EMA, which means there is no immediate threat to the nascent bull market. However, all four technical indicators have touched lower bottoms than the ones touched in Dec ‘12 whereas the Defty has touched a higher bottom.

The combined negative divergences mean some more correction is possible. But the index should get twin support from the rising 200 day EMA and the rising trend line of the ‘ascending triangle’.