Tuesday, May 20, 2008

Resistance Found! Where Do We Go Now?

The Nifty opened on a weak note today because the Asian markets were down and even the American markets despite good gains last evening, lost strength in the later half of the day. This was not taken kindly by the Indian markets and after three blue candles, it decided to show a red one before deciding upon its next direction. But as per our analysis, the markets were in a strong uptrend and were likely to find resistance near 5300. So, what went wrong, why did the market come down today? What is the possible direction of the market now?

Attached above is the daily chart of Nifty. I know there are too many things drawn on the charts and the idea is not to confuse you. The idea is to do a little bit of analysis. And not too much of analysis too because we don’t want a situation of analysis paralysis. But just enough analysis to weigh the strengths against the weaknesses in this chart of Nifty. You can click on the chart to open it in a new window so that you can see a larger image. Let us take each point one by one. We were within a clear well-defined range between the two trendlines marked as 1 and 2. What did us in was this third dashed trendline marked as 3! Were we expecting it to happen? If yes, why wasn’t it discussed here? The answer is no, we were not expecting resistance here. We were expecting a little bit of profit booking soon but not exactly here. Why? Firstly, we were in a well defined range between the two trendlines and we weren’t expecting a third one to interfere in between. Secondly, have a look at the Relative Strength Index (RSI). The RSI has been respecting the trendline since 21st Jan 2008 and had gone well over 60 in the end of April and was clearly showing signs of bullishness. We were not expecting it to find resistance at 60, like it did this time around (as marked by the circle). One reason why the price found resistance here is because it reached the 38.2% retracement level from the 8th Jan 2008 high to 22nd Jan 2008 low. This level too was not expected to be too much of a resistance because this too has been breached a number of times since 22nd Jan 2008 without any real support/resistance. It was probably the combined effect of trendline 3, the 38.2% Fibonacci retracement level and the RSI at 60, all at the same levels, that did us in.

We now have two possibilities. The Nifty may ignore this small resistance soon and continue to go up to trendline 2, in which case the RSI may also cross the resistance at 60 and we could then expect the Nifty to cross 5300 soon too. Another possibility that may happen is that the Nifty continues to respect this trendline and starts coming down in which case it would find support near trendline 1 near 4950. In that case the RSI would also fall. And if it falls too much so as to cross the trendline, we can probably expect the Nifty too to break 4950. Another remote possibility is that this may be a small consolidation and could find support near 5000. Let us wait and see what the market decides to do.

No stocks discussed today.

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