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Wednesday, July 31, 2013

Nifty chart: a mid-week update (Jul 31 ‘13)


Today’s trading action on the daily bar chart pattern of Nifty has produced some interesting technical patterns that have bearish implications. These are:

  • The index has dropped below all its three EMAs into bear territory
  • the blue up trend line connecting the Jun ‘12 and Apr ‘13 lows has been breached
  • The small ‘gap’ between 5700 and 5750 formed in Jun ‘13 has been filled
  • Trading volumes have been rising for the past 3 days as the index fell
  • All four daily technical indicators are looking bearish

There are a few bullish counter-arguments as well:

  • The index had fallen below all three EMAs and the blue up trend line in Jun ‘13 also – but the index had bounced back up into bullish zone; ‘death cross’ of the 50 day EMA below the 200 day EMA that technically signals a bear market was averted
  • Filling a ‘gap’ during a bull phase need not be bearish; see what happened back in Apr ‘13, when the larger ‘gap’ (between 5450 and 5525) formed back in Sep ‘12 got partly filled (the Oct 5 ‘error trade’ will be ignored since it didn’t occur on Sensex or Nifty Futures charts)
  • Usually, trading volumes rise during up moves and shrink during down moves; rising volumes during a down move may be indicating a selling exhaustion (the index recovered substantially by the end of the day)
  • Daily technical indicators ROC and Slow stochastic are in their oversold zones, and RSI is about to enter its oversold zone; though an index can stay oversold for long periods, a bounce-back may be around the corner

Bulls will hope that the older ‘gap’ of Sep ‘12 (marked by blue dotted lines) will once again support the index fall. Even if that ‘gap’ gets filled, the up move is likely to resume thereafter. Many stocks – even large-caps – are trading at attractive, if not mouth-watering, valuations.

A big crash typically follows a euphoric rise when individual stock P/E ratios stretch towards three figures. The gloom and doom all around is hardly conducive to a big crash. It won’t be surprising if smart money starts entering now (if they haven’t done so already – some one is buying the sold shares!).

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