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Wednesday, August 19, 2015

Nifty chart: a mid-week update (Aug 19 ‘15)

Turmoil in the Chinese stock market has kept global markets in check. India’s market has been no exception – despite macroeconomic indicators pointing to an improving economy.

India Inc. appears to be waiting for the government to kick-start the investment cycle. Those companies that had gone ahead with their expansion plans and are sitting on excess production capacities are likely to benefit the most once the economy hits top gear.

During the week so far, FIIs have been net sellers of equity worth about Rs 550 Crores. DIIs have been net buyers worth Rs 700 Crores, as per provisional figures. Nifty has been in a sideways consolidation since the beginning of Jul ‘15.

Nifty_Aug1915

The daily bar chart pattern of Nifty has been consolidating sideways within a ‘symmetrical triangle’ pattern since Jul 1 ‘15. The entire pattern has formed inside the ‘support-resistance zone’ between 8180 and 8630.

Triangles are usually continuation patterns. Since the index entered the triangle from below, the likely breakout from the triangle should be upwards.

The triangle has formed above the rising 200 day EMA. That indicates a bull market consolidation, and is another reason why the breakout from the triangle should be upwards.

However, triangles tend to be unreliable patterns with three possible outcomes: i) an upward breakout; ii) a downward breakout; and iii) a continuation of the consolidation through the apex of the triangle.

So, it is best to wait for one of the three outcomes to play out before jumping in to buy or sell.

Remember that an upward breakout from the triangle (or any consolidation zone) should be accompanied by a significant increase in volumes. Otherwise the breakout may turn out to be a ‘false’ one. A downward breakout does not require volume support for technical validity.

Daily technical indicators are giving mixed signals, which is typical during periods of consolidation. MACD is moving sideways – barely in positive zone and below its falling signal line. ROC is also moving sideways – just inside negative zone and below its 10 day MA.

RSI is above its 50% level, but drifting down. Slow stochastic bounced up from the edge of its oversold zone, but has failed to convincingly cross above its 50% level.

Breakouts from triangles often occur within 6-8 weeks – though longer periods of consolidation do occur. Since 6 weeks have elapsed already, a breakout can happen anytime within the next 2 weeks.

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