NSE Nifty 50 Index Chart Pattern – Jan 14, ‘11

The NSE Nifty 50 index chart pattern has opened up some interesting technical possibilities after this week’s trading. Before I delve into them, here are some of my observations from last week that will help to put things in perspective:

‘The weakness in the technical indicators are pointing to a deeper correction, and a possible test of the 200 day EMA. Immediate down side targets for the Nifty are 5800 (upward sloping trend line of the symmetrical triangle); 5650 (200 day EMA) and 5550 (Aug ‘10 top).’

The support from the 100 day EMA was broken on Mon. Jan 10 ‘11. The next day, the Nifty touched an intra-day low of 5698 – testing the Nov 26 ‘10 intra-day low of 5690. Wed. Jan 12 ‘11 saw the index bounce up sharply, only to face resistance from the 100 day EMA.

Today’s trading took the index below the 200 day EMA when it touched an intra-day low of 5640. The close at 5655 was just above the long-term moving average. The expected test of the 200 day EMA has happened, and the support has held – so far. Will there be a pull back?

Positive divergences in three of the technical indicators are suggesting as much. Though the ROC has moved below its Nov 26 ‘11 low along with the Nifty, the RSI, slow stochastic and MACD are at slightly higher points than their Nov ‘10 lows.

Will it be a strong pull back? The bearish state of the technical indicators may not allow it. The MACD is falling in negative territory and is well below its signal line. The ROC is also falling in negative territory and is well below its 10 day MA. The RSI is at the edge of its oversold zone. The slow stochastic is in its oversold zone.

I have drawn a bearish descending triangle using the Nov 8 ‘10 and Jan 4 ‘11 tops, and the Nov 26 ‘10 and Jan 11 ‘11 bottoms. Today’s trading has broken below the descending triangle, though it has received support from the 200 day EMA. Triangles are not that reliable, but ascending and descending triangles have measuring implications.

The break down below a descending triangle means that Nifty may fall to the extent of the height of the triangle – which is about 650 points (6339 on Nov 5 ‘10 to 5690 on Nov 26 ‘10). So the Nifty 50 can fall to (5690 – 650 =) 5040. Will it, and if so, when?

Those are good questions, and I can not answer them with any certainty. If the Nifty 50 breaks below the 200 day EMA - and the probability is high - the zone between the Aug ‘10 top of 5550 and the Apr ‘10 top of 5400 should provide good support. If 5400 is also broken, we may see 5040 sooner than later.

The poor Nov ‘10 IIP numbers announced last week, continuing high food inflation and the insipid Infosys Q3 results have pushed bulls into a corner. The oil price rise isn’t helping matters. RBI may have no choice but to hike interest rates again, which will be another blow to the stuttering growth story.

Bottomline? The bull market in the Nifty 50 index has been stalled. Economic headwinds in India and recovering markets in USA and Europe have switched FII attention away from emerging markets. Long-term investors can hold with a stop-loss at 5550 (Aug ‘10 top). New entrants should control the urge to jump in, and concentrate on researching good stocks till the correction plays out.