Nifty chart: a mid-week update (Dec 11, ‘13)

The euphoria among investors following announcement of election results in four states and one union territory last Sunday led to Nifty opening with an upward gap and touching lifetime intra-day and closing highs on Mon. Dec 9 ‘13.

But the bullish cheer appears to be fading already. Today’s trade has closed Monday’s upward gap. Even the ‘good news’ of a narrowing trade deficit was ignored by the market. DII sales overwhelmed FII buying.

So, what should investors do now? Take profits home and park the cash in safe tax-free bonds that are on sale now? Or, use the dip to add to existing holdings?

The answer to the question will depend on your risk tolerance and asset allocation plan. Still don’t have an asset allocation plan? Then you will be forever at the mercy of stock market gyrations – not knowing when and how much to buy or sell.

For those who have been following my posts regularly and/or have adequate knowledge of technical analysis, there should be no doubt at all that Nifty is in a bull market – and has been in one for almost 2 years. So, the strategy should be to either buy on dips or hold.

What about filling of Monday’s upward gap? Note the two upward gaps that formed back in Sep ‘13 during the rally from the Aug ‘13 bottom. Both got filled during the subsequent correction – but Nifty resumed its up move and touched a higher top in Nov ‘13.

That is typical chart behaviour in bull markets. Most upward gaps tend to get filled (or part-filled) reasonably quickly – charts don’t particularly like gaps – but up moves resume thereafter. (The reverse happens in bear markets – downward gaps get filled by rallies and the down move resumes thereafter.)

Daily technical indicators are in bullish zones but showing some bearish signs. MACD is above its signal line in positive territory, but its upward momentum has slowed down. RSI is above its 50% level, but turning down. Slow stochastic has dropped from its overbought zone, but is above its 50% level.

Note that all three indicators are showing negative divergences by failing to touch new highs with the index. However, all three EMAs are rising and Nifty is trading above them. So, Nifty is in the midst of another bull market correction/consolidation.

How low can the nifty fall? 6100 - 6200 looks like a good support zone.