Nifty chart: a mid-week update (Jul 17 ‘13)

The daily bar chart pattern of Nifty is showing some typical bull market patterns that should allay the fears of those who are confused about the market’s direction – which is clearly up. Individual portfolios may be telling different stories – particularly if such portfolios are packed with unknown mid-cap and small-cap stocks.

First, note the 200 day EMA. It is rising gradually. The 50 day EMA has remained above the 200 day EMA. The 20 day EMA briefly crossed below the 200 day EMA when Nifty formed its Apr ‘13 low of 5477. It bounced off the 200 day EMA when Nifty touched a slightly higher bottom of 5566 in Jun ‘13. In between, the index touched a 2 years high of 6229 in May ‘13 – continuing a bullish pattern of higher tops and higher bottoms.

Next, look at what happened during the past 4 weeks’ trading. The index corrected below its 200 day EMA for 6 trading sessions; then jumped up with a ‘gap’ (between 5700 and 5750) above its 200 day EMA. A sideways rectangular consolidation for 9 trading sessions was followed by an expected upward break out – since rectangular consolidations tend to be continuation patterns. The break out was with a small ‘gap’ but not accompanied by an increase in volume. The index pulled back to the top of the rectangle – only to bounce up today on a volume spurt. Such pullbacks offer adding opportunities.

The 20 day EMA has crossed above the 50 day EMA, and Nifty is trading above all three EMAs. The stage is set for the next leg up of the bull market. Daily technical indicators are looking bullish. MACD is rising above its signal line in positive territory. ROC is about to cross above its rising 10 day MA. RSI has just slipped down from its overbought zone. Slow stochastic is moving down inside its overbought zone. Note that MACD’s signal line (red) and ROC’s 10 day MA (blue) are forming bullish ‘rounding bottom’ patterns – just like they did back in Apr ‘13.

All technical signals mentioned above point to a bull market that is undergoing some consolidation. It isn’t a raging bull market where you can buy cats and dogs and they start moving up immediately. Stock selection will be the key. Stick to quality – even if they appear ‘expensive’. Good things – like Rolex watches, BMW cars, ITC shares - usually are. Can’t afford good quality stocks? Better buy a good balanced fund, instead of throwing your money away on wild long-shot bets.

(PS: If you are planning to add growth-oriented and fundamentally strong mid-cap/small-cap stocks to your portfolio, but are not sure which stocks to choose, book your paid subscription to my Monthly Investment Newsletter now. New subscriptions will be offered till July 21, ‘13.)