Nifty and Defty charts: a mid-week technical update

Nifty chart

The daily bar chart pattern of Nifty shows a break down below a small head-and-shoulders reversal pattern, followed by good support from the 200 day EMA and a pullback towards the ‘neck line’ of the head-and-shoulders pattern.

This is a textbook example of price behaviour of a head-and-shoulders pattern. The pullback is an opportunity to sell for those who may have not sold during the break down below the ‘neck line’.

As explained in last Saturday’s post, the downward target of the head-and-shoulders pattern is 5550 – which is 100 points below the current level of the 200 day EMA, and 250 points below the current level of Nifty.

Can the Nifty fall lower? There is a support zone between 5450 and 5500 (‘gap’ in chart formed during Sep ‘12; the ‘gap’ was filled by an ‘error trade’ in Oct ‘12 – which should be ignored). In the near term, the zone between 5450 and 5550 should be observed closely for support.

Can the Nifty move higher – above the ‘neck line’? Anything is possible in the stock market. But that would mean the correction is over. Let us see if the Defty chart (below) can throw some light.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) is looking more bearish than the Nifty. Note that the break down below the small head-and-shoulders reversal pattern has simultaneously been a break down below the uptrend line and the 200 day EMA. The pullback is likely to face triple resistance from the ‘neck line’, the uptrend line and the falling 20 day EMA.

The downward target from the head-and-shoulders pattern is 3400. If the Defty falls to that level, it will fill the ‘gap’ in the chart formed in Sep ‘12. Filling of the ‘gap’ is not necessarily long-term bearish. Since the ‘gap’ was formed during an uptrend, filling of the ‘gap’ should be followed by a resumption of the uptrend.

Daily technical indicators are looking bearish even after correcting oversold conditions. MACD is below its signal line in negative territory, but showing signs of turning around. ROC is also negative, but has moved up a bit to touch its 10 day MA. RSI and slow stochastic have emerged from their respective oversold zones, but are well below their 50% levels.

One should respect a reversal pattern that is clearly visible and is followed by a break down and pullback. Selling in a panic is not advised, but part profit booking may be a prudent move.