Nifty and Defty charts: mid-week technical update

Nifty chart

The 1 year daily bar chart pattern of Nifty is testing support from its rising 200 day EMA for the second time this month. Bulls will hope that the support holds. Bears will attempt to push the index down further to fill the gap in the chart – between 5445 and 5525 - formed back in Sep ‘12. (Though the ‘flash crash’ on Oct 5 ‘12 had filled the gap earlier, it was due to an ‘error trade’ and should be ignored.)

Rising volumes on down days is a concern for bulls, because it is usually a sign that the correction will continue. Daily technical indicators are looking quite bearish. MACD has crossed below its signal line in negative territory. ROC has crossed below its 10 day MA in negative zone. RSI is trying to cling on to its 50% level. Slow stochastic has dropped below its 50% level.

Odds of the index dropping further are increasing by the day.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) continues to look more bearish than the Nifty. The rising 200 day EMA has been breached for the second time this month.

FIIs are still net buyers, which has prevented the Defty from falling sharply. But the bearish technical indicators are suggesting that the correction is not over.

The gap in the chart – between 3425 and 3490 – formed in Sep ‘12 is likely to get filled. That should be longer-term bullish because the index should resume its up move subsequently.

Nifty and Defty charts: a mid-week technical update

Nifty chart

The daily bar chart pattern of Nifty shows a break down below a small head-and-shoulders reversal pattern, followed by good support from the 200 day EMA and a pullback towards the ‘neck line’ of the head-and-shoulders pattern.

This is a textbook example of price behaviour of a head-and-shoulders pattern. The pullback is an opportunity to sell for those who may have not sold during the break down below the ‘neck line’.

As explained in last Saturday’s post, the downward target of the head-and-shoulders pattern is 5550 – which is 100 points below the current level of the 200 day EMA, and 250 points below the current level of Nifty.

Can the Nifty fall lower? There is a support zone between 5450 and 5500 (‘gap’ in chart formed during Sep ‘12; the ‘gap’ was filled by an ‘error trade’ in Oct ‘12 – which should be ignored). In the near term, the zone between 5450 and 5550 should be observed closely for support.

Can the Nifty move higher – above the ‘neck line’? Anything is possible in the stock market. But that would mean the correction is over. Let us see if the Defty chart (below) can throw some light.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) is looking more bearish than the Nifty. Note that the break down below the small head-and-shoulders reversal pattern has simultaneously been a break down below the uptrend line and the 200 day EMA. The pullback is likely to face triple resistance from the ‘neck line’, the uptrend line and the falling 20 day EMA.

The downward target from the head-and-shoulders pattern is 3400. If the Defty falls to that level, it will fill the ‘gap’ in the chart formed in Sep ‘12. Filling of the ‘gap’ is not necessarily long-term bearish. Since the ‘gap’ was formed during an uptrend, filling of the ‘gap’ should be followed by a resumption of the uptrend.

Daily technical indicators are looking bearish even after correcting oversold conditions. MACD is below its signal line in negative territory, but showing signs of turning around. ROC is also negative, but has moved up a bit to touch its 10 day MA. RSI and slow stochastic have emerged from their respective oversold zones, but are well below their 50% levels.

One should respect a reversal pattern that is clearly visible and is followed by a break down and pullback. Selling in a panic is not advised, but part profit booking may be a prudent move.

Nifty and Defty charts: a mid-week update

Nifty chart

Negative divergences visible in all four daily technical indicators two weeks back had led to the conclusion that Nifty will drop back inside the long-term resistance zone between 5750 and 5950. But it appears that the Nifty is trying to turn the resistance zone into a support zone – as it is already trying to climb above the 5950 level (it did so intra-day, but not yet on a closing basis).

Bulls should be enthused by the facts that the index is trading above its rising 200 day EMA, and the daily technical indicators are correcting from oversold conditions. Bears will point out that trading volumes have slipped and the index may be in the process of forming a head-and-shoulders reversal pattern (of which, the ‘left shoulder’ and ‘head’ has already formed).

However, the size and duration of the head-and-shoulders pattern (if it does form eventually – there is no guarantee that it will) implies that the subsequent correction is unlikely to be huge. At worst, it may drop below the 200 day EMA and test the Nov ‘12 low. The more likely outcome, in case of the correction continuing, is a drop to 5750 (the lower edge of the resistance zone, which should provide strong support).

Despite dire warnings of a big crash from some Elliott Wave analysts, the correction during the last few days appears more like a bull market correction that is an opportunity to add.

Defty chart

Two weeks back, the following comments were made: “The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) has formed a bullish ‘ascending triangle’ pattern from which the likely break out is upwards… Some more correction can’t be ruled out. If the 50 day EMA fails to provide downside support, expect stronger support from the rising 200 day EMA…”

The Defty chart did drop below its 50 day EMA for a few days, but is trying to move back above it. The index is trading above its rising 200 day EMA, which means there is no immediate threat to the nascent bull market. However, all four technical indicators have touched lower bottoms than the ones touched in Dec ‘12 whereas the Defty has touched a higher bottom.

The combined negative divergences mean some more correction is possible. But the index should get twin support from the rising 200 day EMA and the rising trend line of the ‘ascending triangle’.

Nifty and Defty charts: a mid-week technical update

Nifty chart

In the previous mid-week Nifty update posted two weeks back, the following comments were made: “…all four daily technical indicators are showing negative divergences by failing to touch new highs. That is probably hinting at some consolidation or correction. The correction is not expected to be steep – at worst the index can drop inside the resistance zone.”

The negative divergences occurred during the up move from Dec ‘12 to Feb ‘13 (marked by blue arrows in chart above). The index is receiving triple support – from its 50 day EMA, the 5950 level, and the blue uptrend line drawn within the upward-sloping channel.

Can the index drop back inside the resistance zone between 5750 and 5950? Bearish daily technical indicators seem to suggest so. MACD is positive, but falling below its signal line. ROC has crossed below its 10 day MA into negative territory. RSI formed a head-and-shoulders reversal pattern and has dropped below its 50% level. Slow stochastic has entered its oversold zone.

Nifty is trading above its rising 200 day EMA, so this bull market correction is an opportunity to add. The 5750 level is likely to provide strong downside support.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) has formed a bullish ‘ascending triangle’ pattern from which the likely break out is upwards.

The index showed some hesitation as it neared its Feb ‘12 top. Such hesitation is quite expected near a previous top. Also, three of the four technical indicators – ROC, RSI, slow stochastic – showed negative divergences.

The FIIs have remained net buyers, so any correction due to DII selling is unlikely to be a deep one. Technical indicators haven’t turned bearish yet. MACD is positive, but has slipped below its signal line. ROC has crossed below its 10 day MA, and about to enter negative territory. RSI is above its 50% level. Slow stochastic has dropped to its 50% level.

Some more correction can’t be ruled out. If the 50 day EMA fails to provide downside support, expect stronger support from the rising 200 day EMA, which has merged with the uptrend line of the ‘ascending triangle’.

Nifty and Defty charts: mid-week technical update

Nifty chart

The daily bar chart of Nifty touched a 2 year intra-day high of 6101 on Jan 22, ‘13 but it turned out to be a ‘reversal day’ (higher high, lower close). Not all ‘reversal days’ lead to corrections or trend reversals. A sharp rise in volumes on a ‘reversal day’ is usually an indication that a correction or trend reversal may follow.

For the past 2 months, after crossing above the 5750 level into the ‘resistance zone’ with a volume spurt, the Nifty has traded above all three rising EMAs, and received support from its 20 day EMA. After some hesitation near the top of the resistance zone (5950 level), the index has been gradually moving up towards the upper edge of the blue parallel channel (at about 6200).

The bull market is progressing well. However, all four daily technical indicators are showing negative divergences by failing to touch new highs. That is probably hinting at some consolidation or correction. The correction is not expected to be steep – at worst the index can drop inside the resistance zone.

Q3 results of Infosys, ITC, RIL were positive surprises. HUL results disappointed the market – and has provided an opportunity for entering at lower levels.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty measured in US Dollars) has formed a bullish pattern of higher tops and higher bottoms by crossing its Oct ‘12 intra-day high. It is getting ready to cross its Feb ‘12 top of 3967. The blue uptrend line has not been tested since the ‘flash crash’ on Oct 5 ‘12.

All three EMAs are rising and the Defty is trading above them. The bulls are clearly regaining control. However, daily technical indicators are showing negative divergences by failing to move above their Oct ‘12 levels. Some consolidation or correction can be expected.

As long as FIIs remain net buyers, there is little chance of a big correction despite heavy selling by DIIs. RBI’s interest rate policy announcement later in the month and the Union Budget next month may act as triggers for the next moves in the index.

Nifty and Defty charts: a mid-week update

Nifty chart

Last Wednesday, the Nifty had managed to cross the resistance zone between 5750 and 5950. Since then, the index hasn’t made much progress, but has stayed above the resistance zone. The break out above 5950 was not accompanied by a significant increase in volumes – so the possibility that the break out was a ‘false’ one remains.

All three EMAs are moving up and the index is trading above them – which is the sign of a bull market in progress. All four technical indicators had showed negative divergences by failing to touch new highs. The sideways consolidation above the resistance zone was expected – more so because Q3 results are around the corner.

Daily technical indicators are still bullish, but showing signs of weakness. MACD is touching its signal line in positive territory. ROC is barely positive, and has crossed below its 10 day MA. RSI is moving down towards its 50% level. Slow stochastic has dropped down from its overbought zone.

Nifty may slip down inside the resistance zone – specially if Infosys declares below par results.

Defty chart

The uptrend (marked by the blue uptrend line) and the bull market on the Defty chart (Nifty measured in US Dollars) continues. The 20 day EMA provided good support to the index – just as the 200 day EMA and 50 day EMA had done during Nov ‘12 and Dec ‘12.

Daily technical indicators are showing some bearish signs. MACD has become entangled with its signal line, and moving sideways in positive territory. ROC has dropped to its 10 day MA, and about to cross into negative zone. RSI is resting on its 50% level, and may slip below. Slow stochastic is falling towards its 50% level.

Some more correction or consolidation is likely.

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Nifty and Defty charts: a mid-week technical update

Nifty chart

First, the good news. After struggling for a month to cross above the long-term resistance zone between 5750 and 5950, the Nifty finally managed to climb above 5950. The index touched an intra-day high of 6006 – a level last seen two years back – before closing just below the 6000 level.

Now, the bad news. The break out above 5950 was not accompanied by a significant increase in volumes. Contrast it with the spike in volumes in late Nov ‘12 when Nifty crossed the 5750 level. That means the break out may be a ‘false’ one.

Also, the new high in the Nifty was not matched by any of the four technical indicators – which touched lower highs. The combined negative divergences can lead to some correction or consolidation.

However, daily technical indicators are looking bullish and the next upside resistance is expected from the top edge of the upward-sloping channel at around 6200. It is possible that Nifty may move towards 6200 before correcting/consolidating.

All three EMAs are rising, and the index is trading above them. The bull market in Nifty is intact.

Defty chart

The CNX Defty chart (Nifty calculated in US Dollars) made a gap-up move in today’s trading. FIIs were probably celebrating the last-minute resolution of the ‘fiscal cliff’ issues by the House of Representatives.

The uptrend from May ‘12 lows – marked by the blue uptrend line - has not been tested since the ‘flash crash’ in Oct ‘12. All three EMAs are rising and the Defty is trading above them – which is the sign of a bull market.

Daily technical indicators are looking bullish. MACD has crossed above its signal line in positive territory. ROC has crossed above its 10 day MA into positive zone. RSI has crept above its 50% level. Slow stochastic has climbed sharply towards its overbought zone.

However, all four technical indicators are showing negative divergences by touching lower highs. A correction/consolidation may be around the corner.

(Note: Paid subscriptions to my Monthly Investment Newsletter have been re-opened for the period Jan 1-21, 2013. If you are looking to add fundamentally strong stocks with growth prospects to your portfolio, look no further. Majority of stocks recommended during the past 12 months have provided good returns. Send me an email at mobugobu@yahoo.com for details.)

Nifty and Defty charts: a mid-week technical update

Nifty chart

The daily bar chart pattern of Nifty is trading inside the long-term resistance zone between 5750 and 5950, and seems to be hesitating just below the upper edge of the resistance zone.

The index has also been trading inside an upward-sloping channel (marked by blue parallel lines) for a year. It is in the early stages of a new bull market. All three EMAs are rising and the index is trading above them.

Daily technical indicators are bullish, but looking a bit overbought. MACD is rising sharply above its signal line in positive territory, but hasn’t reached its overbought zone yet. ROC has climbed above its 10 day MA in positive territory, and is just below its overbought zone. Both RSI and slow stochastic have entered their respective overbought zones.

Note that Nifty touched a new 52 week high today, but none of the indicators touched new highs. The combined negative divergences could lead to some profit booking that may push the index down towards the lower edge of the resistance zone at 5750.

Can the index fall below 5750? Not impossible, but unlikely. Why? Because the break out above the 5750 level last week was accompanied by a spurt in volumes. That is usually an indication that the 5750 level may turn into a strong support.

The Lok Sabha voted today in favour of FDI in multi-brand retail after an acrimonious debate for the last 2 days. That could be a positive trigger for the index to breach the 5950 level and move towards the upper edge of the upward-sloping channel.

Defty chart

What was a sideways consolidation in the Nifty chart above (after the ‘flash crash’ of Oct 5 ‘12), became a correction on the CNX Defty chart (Nifty calculated in US Dollars).

The index found good support from its 200 day EMA, and partly filled the ‘gap’ formed above the 200 day EMA in Sep ‘12. (The one-day ‘flash crash’, which only occurred on the Nifty and Defty charts but not on the Sensex chart, will be ignored for technical analysis purposes.)

Daily technical indicators are bullish. MACD has risen above its signal line into positive territory. ROC is also positive, and above its 10 day MA, but its upward momentum is slowing. RSI has reached the edge of its overbought zone. Slow stochastic has entered its overbought zone.

There is a notable difference between the Defty and Nifty charts. The Defty has not touched a new high, so there is no negative divergences visible in the technical indicators. The index may move up to test its Oct ‘12 top of 3917.

(Note: The Nifty has gained more than 30% since its Dec ‘12 low of 4531. Has your portfolio matched Nifty’s gains? No? Write to me for a FREE preliminary review of your portfolio.)

Nifty and Defty charts: mid-week technical update

Nifty chart

The daily bar chart pattern of Nifty has been consolidating within a rectangular band of about 100 points since the ‘flash crash’ a month back. Rectangular patterns are unpredictable because an eventual break out from the pattern can occur in either direction.

Last week’s downward break – following RBI’s policy announcement – proved to be a ‘false’ break out. Why? Because the break out wasn’t confirmed since the index failed to close more than 3% below the support level of around 5630. The 3% ‘whipsaw’ rule takes care of such situations – i.e. you avoid a ‘whipsaw’ by not taking any action.

Today (Nov 7 ‘12), the index has broken out above the rectangle on good volume support. That gives credibility to the upward break out. But again, the 3% ‘whipsaw’ rule becomes applicable. That means, the Nifty needs to close above 5900 for the upward break out to be technically valid.

Should one wait for 5900 to be crossed to enter? Won’t that mean losing more than 100 points of rally? It depends one one’s risk tolerance and skills. The ‘false’ break out last week, followed by a ‘gap’ up move above the 20 day EMA, provided an entry point. Today’s break out was another entry point.

If you missed both, you can wait for a pullback to the top of the rectangle and then enter on the subsequent upward bounce. Whatever you do, keep a stop-loss. Note that Nifty is in an up trend in a bull market. So, all dips can be used as entry points.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty calculated in US Dollars) clearly shows an uptrend in a nascent bull market. The ‘flash crash’ found support on the blue uptrend line. The subsequent correction got good support from the rising 50 day EMA.

Note that the ‘gap’, formed on the chart in Sep ‘12 when Defty moved above its 200 day EMA, was filled by the ‘flash crash’. ‘Gaps’ typically get filled. Some times they get partly filled. Either way, the previous move before the ‘gap’ usually continues. On rare occasions, ‘gaps’ don’t get filled at all. Then they tend to become strong resistances to future down moves.

Technical indicators are about to turn bullish. MACD is below its signal line but has managed to remain in positive territory, and showing signs of moving up. ROC has crossed above its 10 day MA and about to enter positive territory. Both RSI and slow stochastic are rising towards their 50% levels. Looks like the month-long correction is over.

Nifty and Defty charts: a mid-week technical update

Nifty chart

There are three things to note on the daily bar chart pattern of Nifty above:

1. the blue uptrend line – which was breached intra-day by last Friday’s ‘flash crash’
2. the light green oval marking a gap in the chart – which was filled by the ‘flash crash’
3. last Friday’s ‘flash crash’ – which dropped the Nifty below all three EMAs and the uptrend line

As mentioned in last Sunday’s post about Nifty, intra-day breaches of support/resistance levels are not taken into account for technical analysis. Only convincing breaches on a closing basis are important. That hasn’t happened yet for points 1 and 2 above. So technically, the Nifty uptrend remains intact, and the gap on the Nifty chart remains unfilled.

Regarding the ‘flash crash’, five reasons were put forth why the ‘flash crash’ smells of a ‘scam’ rather than an ‘error’. If it looks like a duck and quacks like a duck, then there is very little chance that it is a mouse doing a duck impersonation!

However, the Nifty was looking a bit overbought, and has reacted after briefly entering a strong resistance zone between 5750 and 6000. It is seeking support from its 20 day EMA, and may drop some more in an effort to fill the gap. Technical indicators have corrected from overbought conditions, and beginning to look a bit bearish.

No need to sell in a panic. Since the uptrend is intact (which will be quite clear from the Defty chart below), use the correction to buy. More reforms are in the pipeline. FIIs are likely to greet that with more enthusiasm.

Defty chart

The daily bar chart pattern of CNX Defty (Nifty expressed in US Dollar terms) has an important difference from the Nifty chart above. Last Friday’s ‘flash crash’ found support – marked by an up arrow - exactly on the blue uptrend line. That should answer the question in many investors’ minds about who bought when the Nifty had tanked by 900 points.

The two other points worth noting are the ‘golden cross’ of the 50 day EMA above the 200 day EMA last week, technically confirming a return to a bull market; and, the gap formed on the Defty chart (marked by light green oval) when the index crossed above its 200 day EMA.

A break out with a gap is supposed to be stronger than a break out without a gap. That means, the gap should act as a strong resistance to future down moves.

Technical indicators are beginning to look bearish – so the correction may continue a bit longer. On the downside, support can be expected from the rising 50 day EMA and the gap.

Nifty and Defty charts: mid-week technical update

Nifty chart

The 6 months daily bar chart pattern of Nifty shows the 80 points gap that formed on Sep 14 ‘12. If it remains unfilled, or gets partly filled, then it will be a ‘measuring gap’ with an upward target of 6200. A gap usually gets filled – but there is no rule that it must do so. Even if it does, the up move should resume.

In last Saturday’s post, the band between 5700 and 5950 was mentioned as a strong resistance zone. The Nifty has expectedly failed to cross the resistance zone in its first attempt. But volumes have picked up considerably on up-days, which is a bullish sign.

Technical indicators are overbought, and showing signs of correcting. The index may correct some more and try to fill the gap. If the gap gets filled, the rising 50 day EMA and the blue up trend line should provide support.

All three EMAs are rising and the index is trading above them. That is the sign of a bull market.

Defty chart

The Defty has broken out above its 200 day EMA with a gap. A break out with a gap is supposed to be a ‘stronger break out’. Note that the Defty has been forming a bullish pattern of higher tops and higher bottoms since the break out. The gap hasn’t even been tested yet.

The 20 day EMA has crossed above the 200 day EMA. The 50 day EMA is likely to do so soon, and technically confirm a return to a bull market. The Feb ‘12 top of 3967 is still almost 300 points away. The bulls have got a lot of work to do before they can regain control.

Technical indicators are overbought and showing signs of correction. On the downside, there is a strong support zone between the rising 20 day EMA and the blue up trend line (3250 to 3500). Unless a ‘black swan’ event happens, the up trend should continue.

If you are waiting for much lower levels to buy, your wait may never end. That doesn’t mean indiscriminate buying. Be selective, and maintain stop-losses.

Nifty and Defty charts: a mid-week update

Nifty chart

The Nifty index bounced up smartly from the blue uptrend line and the support zone between 5200 and 5250. Rising volumes indicate bullishness. All three EMAs are moving up and the index is trading above them. Despite the economic slowdown – evident from the disappointing IIP number - and policy paralysis in India, a rush of liquidity from FIIs has propelled the Nifty into a bull market.

There may be some hesitation as the Nifty approaches the zone between 5450 and 5500, where it had made previous tops in Aug ‘12 and Mar ‘12. Remember that resistances during an up move are usually provided by previous bottoms – not tops. Any profit booking in the 5450-5500 zone will be an entry opportunity. Strong resistance is expected only at 5700. That means the Feb ‘12 top of 5630 may get crossed during the current up move.

Technical indicators are looking quite bullish. MACD bounced off the ‘0’ line and has crossed above its signal line. ROC has moved above its 10 day MA into positive territory. RSI has risen above its 50% level. Slow stochastic has climbed sharply to enter its overbought zone. The rally should continue, with occasional profit booking.

RBI is unlikely to tinker with interest rates, as inflation is still quite high. The government is slowly coming around to the idea that some unpopular decisions may need to be taken to reduce the fiscal and current account deficits. So far, they haven’t walked the talk. The stock market seems to have anticipated that government’s hands may be forced by the economic situation.

Defty chart

In previous week’s technical update, following remarks were made about the daily bar chart pattern of Defty: “If the support from the uptrend line holds, Defty is likely to cross above its 200 day EMA during the next up move.”

The uptrend line provided excellent support. Defty bounced up above its 20 day and 50 day EMAs and looks all set to cross above its 200 day EMA. However, a bull market will be technically confirmed only when the 50 day EMA crosses above the 200 day EMA. Even then, it is unlikely to be a runaway bull market.

Technical indicators have turned bullish. MACD has bounced up from its ‘0’ line and just crossed above its signal line. ROC has entered the positive zone above its 10 day MA. RSI has moved above its 50% level. Slow stochastic has entered its overbought zone.

This is not the time to chase after unknown or beaten-down or ‘cheap’ mid-cap or small-cap stocks. Look at well-known and established blue-chip stocks from the large-cap or mid-cap universe, even if their valuations do not appear that attractive. The market always values the better stocks at a premium.

Nifty and Defty charts: a mid-week technical update

Nifty chart

In last week’s update, the importance of the support zone between 5200 and 5250 was explained. At today’s close, the Nifty index has taken support at the blue uptrend line - exactly in the middle of the support zone. Combined support from the 200 day EMA and the 5200 level is expected in case the uptrend line is breached.

A convincing breach of the 5200 level and a drop below the Jul ‘12 low of 5032 would mean the end of the intermediate uptrend that started from the Jun ‘12 low of 4770. Will the Nifty bounce up from the support zone? Or, will it start a down trend?

Bearish technical indicators are pointing to a continuation of the correction. MACD is falling below its signal line, and about to enter negative territory. ROC is below its 10 day MA, and falling deeper into negative territory. RSI has dropped to the edge of its oversold zone. Slow stochastic is inside its oversold zone. Except for MACD, the other three indicators are looking oversold. So, an upward bounce can occur at any time.

RBI has maintained status quo on interest rates for the past few months, but banks have started to pare their lending rates. The marginally higher GDP figure for Q1 is another indication that the economy may be bottoming out. The current dip can be used to buy the shares of fundamentally strong, low debt companies – but with appropriate stop-losses in case the uptrend comes to an end.

Defty chart

The daily bar chart pattern of Defty (Nifty calculated in US Dollar terms) is in a bear market, as it is trading below all three EMAs. However, the blue uptrend line connecting the Jun and Jul ‘12 bottoms hasn’t been tested yet. If the support from the uptrend line holds, Defty is likely to cross above its 200 day EMA during the next up move.

Technical indicators are looking bearish, to the point of being oversold. MACD is falling below its signal line, and ready to enter the negative zone. ROC is negative, and falling below its 10 day MA. RSI is just above its oversold zone. Slow stochastic is inside its oversold zone.

The stalemate between the UPA and BJP continues in Parliament – a case of the pot calling the kettle black! With just a couple of days left for the Monsoon Session, there is very little chance of any important bills getting passed. The shocking sight of MPs indulging in fisticuffs in the upper house shows that India is far away from earning a place among global leaders.

In spite of the pathetic state of our political leadership, some companies will continue to thrive because of their innovative managements and strong product/service portfolios. When there is uncertainty and gloom all around, a contrarian approach can reap rich dividends.

Nifty and Defty charts: a mid-week update

Nifty chart

After breaking out of the large symmetrical triangle pattern earlier in the month, the daily bar chart pattern of the Nifty is pulling back towards the triangle. It has dropped below its 20 day EMA and approaching a strong support zone between 5200 and 5250.

Why is it a strong support zone? Note that the top of the triangle and the 50 day EMA are currently at the 5250 level. If the Nifty fails to bounce up from 5250, it should get stronger support from 5200. 5200 is a long-term support/resistance level. Also, the 200 day EMA and the up trend line connecting the Jun and Jul ‘12 bottoms is also near 5200.

Those who failed to enter on the break out above the triangle may get an opportunity to enter on a bounce up from the 5200 – 5250 zone. However, technical indicators are looking quite bearish – so wait for the upward bounce before entering. A drop below the 5200 level may change bullish plans.

FIIs are still in buying mode. Unless they suddenly head for the exit, a deep correction in the Nifty chart can be ruled out.

Defty chart

It isn’t a great surprise that the daily bar chart pattern of the Defty is looking a lot more bearish than the Nifty – thanks to the continued weakness of the Rupee against the US Dollar. The index failed to cross above its falling 200 day EMA and has dropped down to seek support from its 50 day EMA.

Bulls can take heart from the fact that the up trend line joining the bottoms touched in Jun and Jul ‘12 is still intact. Technical indicators are bearish, but not too far from becoming oversold. An upward bounce from the 50 day EMA or the up trend line is a possibility, and can be used as a buying opportunity.

Not much has changed on the economic front. No bills are getting passed in the monsoon session of parliament because the BJP has got on a high horse of anti-corruption from which it is unable to dismount. BJP-ruled states are hardly free of scams and corruption. Good monsoon rains in August have made up most of the earlier shortfall. Except for the Saurashtra region in Gujarat, the rest of the country is no longer facing a drought. Any worries about two-wheeler and FMCG companies facing growth problems can be set aside.

Nifty and Defty charts: a mid-week technical update

Nifty chart

The daily bar chart pattern of Nifty has broken out above the symmetrical triangle pattern – thanks to relentless buying by FIIs. Of late, the DIIs have joined the bull bandwagon. The index has formed a bullish pattern of higher tops and higher bottoms since touching its Jun ‘12 low.

Both the 20 day and the 50 day EMA have moved above the 200 day EMA. Technically, Nifty is back in bull territory. Volumes have been rising for the past few days. Technical indicators are also looking bullish. So, is the bear market finally over?

For the bulls to regain control, Nifty has to cross convincingly above its Feb ‘12 top of 5630 – which is almost 300 points (more than 5%) higher than today’s closing level of 5338. That may not appear to be too difficult a task, but first the index has to overcome some rough terrain.

Today’s trading bar shows a close very near the lowest level of the day (5331). Combined with the high volume, it becomes a ‘distribution day’ that may end the rally. All four technical indicators are showing negative divergences – MACD and RSI have touched lower tops while ROC and slow stochastic have touched their previous tops.

A likely pullback to the top edge of the triangle, if followed by an upward bounce, will be a buying opportunity. But a pullback inside the triangle may prolong the sideways consolidation.

Defty chart

Despite heavy buying by FIIs, Defty’s one year bar chart pattern still looks bearish. The index just about managed to reach its Jul 4 ‘12 top of 3391, but is still trading below its falling 200 day EMA. The 50 day EMA is well below the 200 day EMA – a sign of a bear market.

All four technical indicators are showing negative divergences by reaching lower tops. Today’s high volume ‘distribution day’ bar may end the rally. A convincing break out above the 200 day EMA will be the first real bullish sign. A move above the Feb ‘12 top of 3967 will put the bulls back on top.

Fundamentally, things are not getting better. In fact, they may be getting worse. GDP growth is slowing down. Drought-like conditions in many parts of the country will fuel food price inflation, and force the RBI’s hand in keeping the high interest rates intact. Oil price is going up and exports are going down – worsening the balance of payments situation. Positive statements from the Finance Minister hasn’t translated into any policy action as yet.

So, why are the indices moving up? Because the economic situation is expected to get better after 6 months, and stock markets tend to ‘discount’ positive news in advance. Will the economic situation in India – and globally – get better in the next 6 months? Some one can get seriously rich if she knows the answer to that question!

Nifty and Defty charts: a mid-week update

Nifty chart

In last Saturday’s post, it was observed that the three EMAs had come close to each other and the following comments were made: “A sharp move usually follows. The only way for the move to be upwards is if FIIs start buying in huge volumes. Possible, but unlikely. So, brace yourself for a sharp down move at any time.” 

The unlikely seems to have happened. FIIs turned huge net buyers. DII selling could not prevent the Nifty from climbing above all three EMAs into bull territory. So, is it time to buy? Not yet, because the rally has been accompanied by sliding volumes. The technical indicators are also not very bullish. MACD is barely positive, and touching its signal line. ROC crossed above its 10 day MA into positive territory, only to turn down. RSI has just reached its 50% level. Slow stochastic has risen sharply to the edge of its overbought zone.

Nifty is consolidating within a large ‘symmetrical triangle’ pattern since touching its Dec ‘11 low. Triangles are notorious for being unreliable, because the eventual break out can be in either direction. The index is close to the upper edge of the triangle. An upward break out supported by strong volumes can change the trend to a bullish one.

But there is nothing to be bullish about as far as the economy is concerned. RBI Governor has lowered his GDP growth forecast for 2012-13 and expects inflation to move up. That means no interest rate cuts in the near term. FIIs (or is it round-tripping of very dark-coloured money from India?) may be setting up a bull trap. Be prepared for a sharp down move if the Nifty finds resistance from the upper edge of the triangle.

Defty chart

Unlike the Nifty, which has been moving in and out of bull territory in 2012, Defty remains in a bear market and continues to trade below its falling 200 day EMA. The index has managed to climb above its entangled 20 day and 50 day EMAs, but has a lot of ground to cover before testing its 200 day EMA. The support level of 2960 should be closely watched. A drop below will be very bearish.

Technical indicators are looking mildly bullish. MACD is barely positive, and touching its signal line. ROC has crossed above its 10 day MA and trying to enter the positive zone. RSI has risen to its 50% level. Slow stochastic has moved above its 50% level.

The rally may continue for a couple of more days, but is expected to face resistance from the 200 day EMA, if it doesn’t fizzle out sooner. Market players became enthusiastic when the PM took charge of the Finance Ministry. But nothing of note happened. Now there is excitement that Chidambaram as Finance Minister may announce some market-friendly policies. I’m not a betting man, but if I was, I would keep my wallet in my pocket.

Nifty and Defty charts: a mid-week technical update

Nifty chart

The one year daily bar chart pattern of the Nifty 50 index is firmly in the grasp of bears. Note that the expected break down below the ‘rising wedge’ pattern occurred with a gap, which is very bearish. After consolidating for a few days above the 200 day EMA, Nifty has fallen below its long-term moving average - with another gap.

The 50 day EMA has merged with the 200 day EMA. The 20 day EMA has formed a bearish ‘inverted saucer’ pattern and is all set to fall below the 200 day EMA. Another bear market rally came to nought. The only silver lining for the bulls is that Nifty is trading above the blue up trend line joining the Dec ‘11 and Jun ‘12 lows. There is a possibility that the index may find support at the trend line.

Technical indicators are quite bearish. MACD is falling below its signal line, and about to enter negative territory. ROC is negative and below its 10 day MA. RSI and slow stochastic have entered their oversold zones, and may stay there for a few days like they did a couple of months ago.

A test of support from the blue up trend line seems a distinct possibility. A drop below the trend line will be very bearish.

Defty chart

Bears are in complete control over the Defty chart – despite buying by FIIs through most of the month. The index dropped with a gap below the entangled 20 day and 50 day EMAs, and is getting ready to test the support level of 2960. Will the support hold?

Technical indicators are not holding out much hope. MACD is below its signal line, and has slipped into negative territory. ROC is also negative, and below its 10 day MA. RSI and slow stochastic have entered their oversold zones. A breach of 2960 can drop the Defty to much lower levels.

Bulls are praying for rain and some reform announcements from the government – neither of which have been forthcoming. The fact that FMCG stocks have come out with good results and are trading near life-time highs is an indication that the bear market isn’t over yet. But it will be. Neither bull nor bear markets last forever.

Nifty and Defty charts: mid-week technical update

Nifty chart 

The daily closing chart of the Nifty index is concurrently showing bullish and bearish patterns. Good news for the bulls is that the 20 day EMA has crossed above the 200 day EMA, and the 50 day EMA has formed a bullish rounding-bottom pattern and is about to cross above the 200 day EMA.

The 50 day EMA had crossed above the 200 day EMA in Feb ‘12 and stayed above the long-term moving average for two months. But the bulls could not regain control of the Nifty chart. Will the current attempt be successful? Not if the bearish ‘rising wedge’ pattern plays out as it is supposed to. A break down below the wedge can drop Nifty below its Jun ‘12 low.

Technical indicators are bullish, but showing signs of weakness. MACD is positive and just above its signal line, but the upward momentum has stalled and the histogram is falling. ROC is also positive but is touching its 10 day MA and touched a lower top as the index rose higher. Slow stochastic is inside its overbought zone, but sliding downwards. RSI formed a small head-and-shoulders reversal pattern in its overbought zone, which is a bearish sign.

FII buying has been a feature of the current rally. DII selling has prevented a runaway rally. However, many FIIs are becoming increasingly vocal about the propensity of India’s politicians to be self-serving, corrupt and prone to shooting themselves in the foot. Time may be running out for the UPA government to promote market-friendly policies.

Defty chart 

A week back, the following comments were posted about the Defty chart pattern: “ROC has moved up sharply above its 10 day MA. But such a sharp move usually heralds a correction.” The correction started before the Defty could move up to test resistance from its falling 200 day EMA.

Technical indicators are bullish, and have corrected overbought conditions. MACD is positive and above its signal line, but is moving sideways. ROC is also positive and above its 10 day MA, but is not moving up. RSI and slow stochastic are just below their overbought zones.

The bear market in the Defty chart will remain in force as long as the index trades below its falling 200 day EMA. Q1 results are unlikely to be good. Inflation and interest rate remains high. GDP growth is slowing down. These are not bullish signs.

Nifty and Defty charts: a mid-week update

Nifty chart

After a bullish high volume ‘gap up’ break out last Friday (Jun 29 ‘12) above the 200 day EMA and the support-resistance level of 5175, Nifty has made laboured upward progress this week. Volumes have been quite good, so why the slow progress?

Two reasons. Note that three of the four technical indicators – ROC, RSI, slow stochastic – have touched lower tops as the Nifty has moved higher. Negative divergences have acted as a brake, and may cause a pullback towards the 5175 level. While FIIs have been net buyers, DIIs have been net sellers. That has also acted as a brake.

The 20 day EMA has moved up to touch the 200 day EMA. A cross above will be a short-term positive. The 50 day EMA is forming a bullish rounding-bottom pattern. A ‘golden cross’ above the 200 day EMA will technically confirm a return to a bull market. For bulls to regain complete control, Nifty has to move above its Feb ‘12 top of 5630.

Technical indicators are bullish. MACD is rising above its signal line in positive territory. ROC is positive and above its 10 day MA. Both RSI and slow stochastic are in their overbought zones. Any pullback will be an entry opportunity.

Defty chart

The one year bar chart pattern of Defty (Nifty measured in US Dollars) is showing a stronger up move than the Nifty. How come? Because the Indian Rupee has gained against the US Dollar over the past few days, thanks partly to FII buying.

Why are FIIs buying? They are probably relieved that the fear of a Eurozone break-up has proved unfounded. Plus, the positive statements coming out of the Finance Ministry after the change of guard has improved market sentiments.

Technical indicators have turned bullish. MACD is rising above its signal line in positive territory. ROC has moved up sharply above its 10 day MA. But such a sharp move usually heralds a correction. RSI and slow stochastic are inside their overbought levels. A test of the falling 200 day EMA is likely.

Remember that the Defty is technically in a bear market, as it is trading below its falling 200 day EMA. Both the 20 day and 50 day EMAs are also trading below the 200 day EMA. Some profit booking can be expected at any time.

If the positive statements from the Finance Ministry do not turn into concrete action soon, FIIs may lose their patience and go elsewhere. Stock markets in countries like Turkey and Phillippines have outperformed India in the first six months.

Stick to the best stocks in the large-cap space for now. The time for mid-cap and small-cap stocks has not arrived yet.

Nifty and Defty charts: a mid-week technical update

Nifty chart

Nifty touched a slightly higher intra-day high of 5195 on Mon. Jun 25 ‘12, but formed another ‘reversal day’ pattern (higher high, lower close). The index is consolidating sideways with a slightly upward bias, but has so far been unable to convincingly cross above its 200 day EMA and the support-resistance level of 5175.

The 20 day EMA has moved up to touch the 50 day EMA, but both EMAs are still below the 200 day EMA. The bulls still have a lot of work to do before the bears can be shaken off.

Technical indicators are bullish but showing signs of weakness. MACD has stopped rising and about to touch its signal line in positive territory. ROC crossed below its 10 day MA and dropped to the ‘0’ line, from where it is trying to bounce up. RSI and slow stochastic have dropped from their overbought zones, but are above their 50% levels.

RSI has formed a double-top reversal pattern. ROC is sliding while the Nifty is moving up. These are negative signals. 20 day EMA has formed a rounding-bottom pattern, which is a positive. Nifty appears to be treading water prior to F&O expiry day.

Our former FM is preparing for the Presidential race. PM has taken charge of the Finance Ministry. The market seems to be expecting some big-ticket reforms – which may not happen just yet.

Defty chart

Defty (Nifty measured in US Dollars) is consolidating sideways with a downward bias – thanks to the continued weakness of the Rupee against the Dollar. The index has slipped below its 20 day EMA and is trading below its 50 day and 200 day EMAs – sign of a bear market.

Technical indicators are looking bearish. MACD is about to touch its signal line in negative territory. ROC has dropped below its 10 day MA into the negative zone. RSI and slow stochastic have fallen below their 50% levels.

Another test of the support level of 2960 is likely. Bulls will hope that the support holds. A breach of 2960 will be very bearish, because FIIs – who started the Dec ‘11 rally by buying at 2960 - will probably start to sell.

The next trigger for the stock market may come from the Eurozone summit meeting, but it is better not to hope for a miraculous turnaround of their sliding economies. Q1 results to be declared next month are unlikely to bring much cheer. Monsoon arrived late and is playing truant. Not much positives to look forward to in the near future.

Continue to hold on to existing portfolios. Stay away from speculative and ‘theme’ stocks. Look to enter large-cap stocks that are facing temporary setbacks.