Nifty chart: a mid-week update (Oct 21 ‘15)

The daily bar chart pattern of Nifty formed an ‘inverse head and shoulders’ reversal pattern and broke out upwards to completely fill the ‘measuring gap’ that had formed on the chart on Mon. Aug 24 ‘15.

The 20 day EMA has just crossed above the 50 day EMA, and both EMAs are moving up after forming bullish ‘rounding bottom’ patterns. Nifty has spent 4 trading sessions in a row above its 200 day EMA in bull territory.

The index is now facing resistance from a smaller ‘breakaway gap’ - between 8322 and 8360 - that formed on Fri. Aug 21 ‘15. Just above the ‘breakaway gap’ is the blue down trend line, which has been dominating the chart since Nifty touched its lifetime high of 9119 on Mar 4 ‘15.

Will the index be able to cross the two hurdles – or will bears step in for a last ditch stand? The answer is: Yes to both, but in reverse order. In other words, bears are likely to put up a fight, but bulls may prevail.

Why? Because the long-term bull market is intact – as Nifty continues to trade well above its rising 200 week EMA (not shown). What we have witnessed since the Mar ‘15 top is a long bull market correction – which is coming to an end.

Couple of technical confirmations of a resumption of the bull market are still awaited – Nifty needs to cross above the blue down trend line; and the 20 day and 50 day EMAs need to cross above the 200 day EMA.

With FIIs back in ‘buy mode’ (though they were small net sellers of equity today), the technical confirmations should come sooner than later.

Daily technical indicators are correcting overbought conditions. MACD is above its signal line in positive zone, but its upward momentum has stalled. ROC has dropped from its overbought zone and crossed below it 10 day MA.

RSI fallen to the edge of its overbought zone. Slow stochastic has started correcting after forming a ‘double top’ reversal pattern inside its overbought zone.

Some more consolidation or correction is a possibility, and a drop into the ‘measuring gap’ can’t be ruled out. Bulls are likely to use any dips to buy.