Nifty and Defty charts: a mid-week technical update

Nifty chart

In the previous mid-week Nifty update posted two weeks back, the following comments were made: “…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.”

The negative divergences occurred during the up move from Dec ‘12 to Feb ‘13 (marked by blue arrows in chart above). The index is receiving triple support – from its 50 day EMA, the 5950 level, and the blue uptrend line drawn within the upward-sloping channel.

Can the index drop back inside the resistance zone between 5750 and 5950? Bearish daily technical indicators seem to suggest so. MACD is positive, but falling below its signal line. ROC has crossed below its 10 day MA into negative territory. RSI formed a head-and-shoulders reversal pattern and has dropped below its 50% level. Slow stochastic has entered its oversold zone.

Nifty is trading above its rising 200 day EMA, so this bull market correction is an opportunity to add. The 5750 level is likely to provide strong downside support.

Defty chart

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.

The index showed some hesitation as it neared its Feb ‘12 top. Such hesitation is quite expected near a previous top. Also, three of the four technical indicators – ROC, RSI, slow stochastic – showed negative divergences.

The FIIs have remained net buyers, so any correction due to DII selling is unlikely to be a deep one. Technical indicators haven’t turned bearish yet. MACD is positive, but has slipped below its signal line. ROC has crossed below its 10 day MA, and about to enter negative territory. RSI is above its 50% level. Slow stochastic has dropped to its 50% level.

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, which has merged with the uptrend line of the ‘ascending triangle’.