Nifty chart: a mid-week update (Jun 18 ‘14)

The higher WPI inflation number was a fly in the ointment. Any interest rate cut by RBI will need to wait. A delayed and possibly deficient monsoon due to El Nino effect is another concern.

The insurgency in Iraq could be a potential game changer if the oilfields in the south fall into rebel hands. Oil prices have already spiked up, and that will widen the current account deficit.

There are rumours of an alliance between Iran and USA to thwart the ISIS rebels in Iraq. Just a few months back, USA tried to pressurise India to curtail relations with Iran. No wonder American writer Charles D. Warner had said: “Politics makes strange bedfellows”.

The clear majority of the Modi-led NDA in the recent elections has boosted bullish sentiments to such an extent that Nifty is forming one bullish pattern after another even when bad news hits the market.

The upward ‘gap’ formed on May 13 ‘14 remains unfilled. Above it is a bullish ‘flag’ pattern - a period of consolidation after the huge intra-day gyrations on election results day (May 16 ‘14).

A break out above the ‘flag’ has been followed by another consolidation within a likely ‘falling wedge’ pattern that has bullish implications.

The bad news for bulls is that today’s close is lower than the intra-day high touched on May 16 ‘14. In other words, the Nifty has made zero gain in the past month.

The good news is that overbought conditions have largely dissipated – as visible on the technical indicators. MACD is still inside its overbought zone, but has started sliding and has crossed below its signal line. ROC is falling below its 10 day MA in positive zone. RSI has moved up to the edge of its overbought zone after falling from it. Slow stochastic has slipped down from its overbought zone.

A likely upward break out from the wedge should propel the index towards 8000. Interestingly, FIIs and DIIs were both net buyers today, but the index dropped on strong volumes.

All three EMAs are rising and Nifty is trading above them in a long-term bull market. Stay invested. Use dips to add. Book profits in mid-cap and small-cap stocks that have risen sharply.