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Wednesday, March 5, 2014

Nifty chart: a mid-week update (Mar 05, ‘14)

The suspense regarding general election dates are over. Polling will be staggered over 5 weeks from April 7 to May 12, with results announcement on May 16. That sets the stage for a pre-election rally – or, does it?

After the poor Q3 GDP number of 4.7%, came some good news: Q3 Current Account Deficit narrowed to US $4.2 Billion against $5.2 Billion in Q2 and a massive $31.9 Billion a year ago. Restriction on gold imports plus improvement in exports played their parts.

Nifty has surged to the upper edge of the rectangle within which it has been consolidating for 5 months – thanks to renewed buying by FIIs. Will it finally break out of the rectangle, or will it continue to consolidate within it?

Nifty_Mar0514

All technical signs appear to be bullish. Technical indicators are in bullish zones, though RSI and Slow stochastic are looking overbought. The 20 day EMA has crossed above the 50 day EMA after forming a bullish ‘rounding bottom’ pattern. All three EMAs are rising and the index is trading above them.

Logically, Nifty should break out above the rectangle soon. But the stock market moves on sentiment rather than logic in the near term. It was negative sentiment due to Russia’s ‘occupation’ of Crimea that caused a drop on Monday (Mar 3). As war tensions eased on Tuesday, sentiment turned positive and Nifty resumed its rally.

In candlestick parlance, Nifty may be forming an ‘evening star doji’ which can lead to a trend reversal. So, a break out may occur only after a correction. The likely dip can be bought.

Since rectangles tend to be unreliable, it is better to wait for the eventual break out. Note the ‘false’ break out that occurred on Dec 9 ‘13. An upward break out should be accompanied by a significant increase in volumes.

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