Nifty chart: a mid-week update (Sep 09 ‘15)

 

The nature of the two ‘gaps’ formed on the daily bar chart pattern of Nifty were explained in last week’s update. The downward target of 7630 for the index was easily met.

Two of the four technical conditions of a bear market have been confirmed. All three EMAs are falling, and the index is trading well below them. The ‘death cross’  of the 50 day EMA below the 200 day EMA (marked by light blue circle) usually confirms a bear market.

However, two more technical confirmations of a bear market are still awaited. Nifty has corrected 17% from its all-time high of 9119, touched on Mar 4 ‘15. A bear market requires at least 20% correction from the top.

Also, the index has retraced almost 40% of its entire rise of 4000 points from its Aug ‘13 low to its Mar ‘15 high. More than a 50% (Fibonacci) retracement is required to confirm a bear market.

So, Nifty will need to fall to 7119 for a long-term trend change from bull to bear. That may not happen just yet due to the following technical developments:

Nifty had touched an intra-day low of 7546 and closed at a new 52 week low of 7559 on Tue. Sep 7 ‘15. The next day, it touched a lower low of 7539, but closed much higher at 7688 with good volume support – forming a ‘reversal day’ pattern that usually ends intermediate down moves.

The entire trading (of 12 sessions) below the ‘measuring gap’ formed a ‘falling wedge’ pattern, from which the index broke out upwards with good volume support and a ‘gap’. A breakout with a ‘gap’ has greater technical significance.

Is the correction over? The technical signs are quite promising, but it is too early to call. Nifty will need to move above the ‘measuring gap’ and its three EMAs into bull territory. That may not happen in a hurry.

Daily technical indicators are in the process of correcting oversold conditions but are yet to turn bullish. MACD is turning up towards its falling signal line inside oversold zone. ROC formed a ‘double bottom’ reversal pattern inside its oversold zone and is poised to enter positive territory.

RSI showed positive divergence by not falling lower with the index, and has just emerged from its oversold zone. Slow stochastic is trying to follow suit.

Bears are unlikely to give up their 6 months long domination of the Nifty chart easily. So, try not to jump into the market feet first. Careful stock selection will determine your returns. Fundamentally strong stocks that have fallen less than the index are likely to perform better.