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Wednesday, January 15, 2014

Nifty chart: a mid-week update (Jan 15, ‘14)

For more than 3 months, Nifty has been consolidating within a rectangle pattern – with its lower boundary at 5970 and its upper boundary at 6350. There was a single day’s spurt – on Dec 9 ‘13 – when the index breached the rectangle to touch an all-time high of 6415, but closed almost at the upper boundary of the rectangle.

Note that throughout the consolidation period within the rectangle, the 20 day EMA remained above the 50 day EMA and the 50 day EMA remained above the 200 day EMA. Other than a couple of brief drops below the 50 day EMA in Nov ‘13, Nifty has received good support from its medium-term moving average.

During the entire consolidation period, the 200 day EMA has gradually climbed up, and Nifty has remained above its long-term moving average. All these are clear signs that Nifty is in a bull market, and should continue its upward move once it breaks out of the rectangle.

Nifty_Jan1514

Rectangles are usually continuation patterns – which means the likely break out should be upwards, since the index entered the rectangle from below. There is another reason to expect an upward break out. For the past couple of months, Nifty has been testing the upper boundary of the rectangle, without falling to the lower boundary.

Technical analysis is not a science, but based on observation of price patterns over many years across various charts. Also, rectangles tend to be unreliable. So, it is better to await the eventual break out before taking a buy/sell decision.

However, if you are one of those who think and invest for the long-term, such a sideways consolidation in a bull market offers a good opportunity to gradually accumulate fundamentally strong stocks. If you feel worried about a downward break from the rectangle, keep a stop-loss at 5970 (which also coincides with the level of the 200 day EMA).

Daily technical indicators are turning bullish. MACD has formed a rounding bottom pattern and just crossed above its signal line in positive territory. ROC has crossed above its 10 day MA to enter positive territory. Both RSI and Slow stochastic have risen above their respective 50% levels.

Note that an upward break out from the rectangle should be accompanied by a volume surge – otherwise the break out may turn out to be a ‘false’ one. Lower CPI and WPI inflation numbers appear to have encouraged the bulls. But one must remember that a high base effect is at play here.

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