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Wednesday, May 14, 2014

Nifty chart: a mid-week update (May 14 ‘14)

Nifty_May1414

Nifty has formed several interesting patterns that have upside and downside implications. Some of these have been discussed in earlier posts, but are being repeated here.

1) The 5 months long sideways consolidation within a ‘rectangle’ pattern followed by an upward break out – validated by a volume surge. Rectangles have measurement implications that gave an upside target of 6750. This target has been met already.

2) Immediately after the break out from the ‘rectangle’, the index entered another short sideways consolidation within a ‘flag’ pattern that also has measuring implications. The upward target from the ‘flag’ break out – validated by an uptick in volumes – was 7170.

By touching an intra-day high of 7172 on Tue. May 13 ‘14, Nifty has almost met the target. Why almost? Because targets are met only if an index (or stock) closes the day on or above the target. That hasn’t happened yet. For explanations about how the above two targets were arrived at, please read the blog post of Apr. 2 ‘14.

3) Next comes the level of 6640 (just above the ‘flag’) that provided good support to Nifty from the end of Mar ‘14 to the first week of May ‘14. The possible technical significance of why 6640 turned out to be a support level was explained in last week’s mid-week update.

4) Now, the latest pattern that can provide an insight into Nifty’s next target – an upward ‘gap’ of about 47 points formed on Tue. May 13 ‘14. In a post written way back in Sep ‘09, four different types of gaps and their significances were explained.

Since the ‘gap’ has formed in the middle of a fresh up move, it can be considered a ‘runaway’ or ‘measuring’ gap. The upward target is calculated as follows:

The low of Feb ‘14 – from where the fresh up move started – was at 5933. The middle of the ‘measuring gap’ is at 7044 (= previous day’s intra-day top of 7020 + half of the ‘gap’ of 47 points). So, the ‘length’ of the up move is 7044 – 5933 = 1111 points.

The upward target should be the same, i.e. 1111 points - to be added to the middle of the ‘gap’ at 7044 to arrive at 8155. This should be the next target for Nifty.

Please note that bull market targets are often exceeded. Also, remember that the market doesn’t understand logic or arithmetic. So, technical targets are to be taken with a pinch of salt. When will this target be achieved? Good question!

If the NDA gets a simple majority – which appears to be priced in already – then the target achievement may take about 3 months. But if NDA gets upwards of 300 seats – as some experts are suggesting – then the target may get achieved within the next two weeks.

By now, every one must have forgotten that there are some downside implications as well! In case NDA fails to get a majority and needs the help of potential allies, then Nifty can correct sharply. First support should be at 6640. If that gets breached, then the top of the ‘rectangle’ – at about 6350 should provide stronger support.

All four technical indicators are inside their respective overbought zones, but are showing negative divergences by failing to touch new highs with the index. Some consolidation or correction is likely. Even if the ‘gap’ gets filled, the up move should resume thereafter.

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