Nifty chart: a mid-week update (Jul 10 ‘13)

After spending 6 consecutive trading sessions below its 200 day EMA, Nifty moved up with a ‘gap’ (between 5700 and 5750) above its 200 day EMA and closed above all three EMAs after touching a high of 5904 on Jul 1 ‘13. In the process, the index retraced about 51% of its fall from its May ‘13 intra-day top of 6229 and its Jun ‘13 intra-day low of 5566.

A retracement of 50% or more is usually a signal of a change of trend – in this case, from bearish to bullish. The bullishness is confirmed by the facts that the 50 day EMA has remained above the 200 day EMA and the 20 day EMA has bounced up after coming close to touching the 200 day EMA.

The index has been consolidating within a rectangular band between 5750 and 5904 for the past 9 trading sessions, during which it has closed above the 200 day EMA every single day. Rectangular consolidation zones are usually continuation patterns. Since Nifty entered the consolidation zone from below, it is expected that the break out will be upwards, with a target of about 6050.

Daily technical indicators are looking bullish. MACD is moving above its signal line, and is about to enter its positive zone. ROC is at the edge of its overbought zone and above its rising 10 day MA. (Note that the 10 day MA is in the process of forming a bullish rounding-bottom pattern.) RSI is rising above its 50% level. Slow stochastic is at the edge of its overbought zone.

Bears are not completely out of the game yet. Nifty’s failure to break out above the 5904 level is probably an indication that bulls are hesitant about the upcoming Q1 results. If results turn out to be worse than expectations, a downward break out may occur.

However, the 200 day EMA and the ‘gap’ are likely to provide downside support to the index. Other stronger downside supports were explained in this previous post.

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