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Wednesday, January 22, 2014

Nifty chart: a mid-week update (Jan 22, ‘14)

Nifty continues to consolidate within a rectangle pattern (mentioned in the previous update) – with its lower boundary at 5970 and its upper boundary at 6350. The 6350 level has provided strong resistance – except for a single day’s breach on Dec 9 ‘13.

What is the index likely to do next? Drop to the lower edge of the rectangle – like it did in Nov ‘13? Fall down further? Continue to consolidate within the rectangle? Break out upwards? Lots of possibilities – so let me try and analyse what the Nifty chart is suggesting.

As mentioned earlier, a ‘rectangle’ is usually a continuation pattern. That means the previous trend before entering the rectangle should continue after the consolidation is over. That means an upward break out is the most likely outcome.

Nifty_Jan2214

However (and there is always a ‘however’ in technical analysis because it is not a science), rectangles tend to be unreliable. That means a downward break from the rectangle can’t be ruled out completely – even though the probability of such an occurrence may be low.

Daily technical indicators are looking bullish. MACD has started rising above its signal line in positive territory. ROC is also rising above its 10 day MA in positive zone. RSI is moving up towards its overbought zone. Slow stochastic has entered its overbought zone. Upward momentum of the index is increasing.

All three EMAs are also rising in tandem, and Nifty is trading above them. Technically, Nifty is in a bull market that is showing increasing upward momentum within a rectangular consolidation zone. An upward break out appears imminent.

Keep an eye on trading volumes, which have been a bit subdued of late. An upward break out above 6350 without a significant increase in volumes may turn out to be a ‘false’ one.

What if the upward break out does take place with strong volumes? Would that be a ‘buy’ signal? Yes, if you are trading the index. If you are a small investor with a portfolio of mid-cap and small-cap stocks, index movements should be less of a concern. Look at charts of the individual stocks instead.

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