Wednesday, April 23, 2008

The Case of the Vanishing Strength

It was a mixed day for the Indian markets today. The markets opened on a weak note today and remained subdued for the next two to three hours. It was only at about 1pm when the markets turned in the positive but soon found resistance at higher levels and started coming down to close only 12 points in the green (Nifty) and 44 points up on BSE.

On the whole, it was a positive for the market that it recovered and closed in the green. What was not positive is the Relative Strength Index (RSI), which again failed to cross 60. It is marked by the blue circle in the chart above. The RSI, as the name suggests, measures the relative strength of the prices now with respect to its historical prices. Theoretically, RSI oscillates between 0 and 100 but 0 and 100 levels are rarely seen. RSI is considered to be oversold below 30 and overbought above 70. A lot of people prefer to say that RSI is bullish above 50 and bearish below it. I am one of the few who believes that RSI is bullish above 60 and bearish below 40. This is why I consider finding resistance at 60 a negative sign. All the strength visible on the charts now seems to be vanishing with the RSI not being able to cross 60.

There is another circle (green) marked on the RSI chart which shows that the RSI had found support at 40 in the beginning of the month. That was an early indication which showed that the prices could have broken out of the range. And that did happen. Today’s RSI is showing that the prices may fall soon, maybe as early as tomorrow. Today was the 6th consecutive close in the positive and it may show a red day soon enough. The last time we saw 6 consecutive up closes was in September 2007 (that time it was 11 consecutive up closes and that is actually quite a rarity). Such other occasions (6 or more than 6 up closes) were in Aug 2007 (8 closes), April 2007 (6 closes) and Nov-Dec 2006 (6 closes).

A downmove should find support between the 4900 and 5000 zone. However, if the Nifty were to fall below that there is a strong support at 4830 which should not be broken. A close below 4830 suggests bearishness.
4800 calls recommended in the beginning of the month could be sold off first thing in the morning. They are gaining about Rs.100/- per unit or Rs.5000/- per lot of Nifty (50 Nifties). No stocks are being recommended today since the market may come down tomorrow and things may be cheaper on Thursday/Friday.

Let’s take a brief look at the American markets. The Dow Jones Industrial Average (DJIA) was moving within a range between 11740 and 12740. Generally, too, there is a lot of resistance at 12740. A close above 12740 yesterday was bullish and that too with a gap. However, a problem with gap days is that the markets tend to close/fill the gap as soon as possible. If this were to happen as early as today then it would be considered a false breakout and we will come back into the range. A noticeable thing on this chart is that again the RSI has not been able to cross 60. But if this breakout is correct (we shall come to know in 2-3 days) then we have a target of about 13700 on the Dow. If that happens, our markets should also remain strong.

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