Sunday, July 20, 2008

Nifty Range Widens - 3800 to 4200

Another fantastic day for the Nifty (and for us) on Friday. The opening wasn’t great and it opened flat and remained so for the next three hours or so, before making a run for the tops. The run lasted throughout the rest of the day and in the end managed to close 145 points above Thursday’s close, which itself was 131 points above Wednesday’s, thus gaining 276 points in two days. Before these two days the Nifty had broken out of a range between 3850 and 4200 to go to a low of 3790 and to close at 3816.

Before these two days of gains, we could have said that the 350 points rangebound movement between 3850 and 4200 had been broken towards the downside and that the new target for the Nifty was 3500. Unfortunately Fortunately, that did not happen and we saw these two terrific days which makes us say that the range has only become broader now, broadly between 3800 and 4200 and a breakthrough on any side should give us a 400 points movement.

Nifty Daily - Range Bound Movement, Bullish Divergence

Seen above is the daily chart of Nifty loaded with the Relative Strength Index (RSI) and a trendline connecting the highs made in mid May and mid June and extended till now. This downward sloping trendline shows that there is resistance for the index near 4165, which will be difficult to cross. In case this resistance is crossed then we have another resistance which is the top of the trading range at 4200. A breakthrough through the 4165 reistance line will indicate that a breakthrough of the trading range may also take place. In case it reverses from 4165 then the inverse is also true that 3800 on the downside may also be broken. A clear uptrend will emerge when the top of the trading range at 4200 is broken through and if the Nifty manages to cross its previous pivot high at 4215.50. Indications of this trading range being broken through on the upside are bright since this is the first time on daily charts that a positive/bullish divergence between the RSI and the prices is seen, as seen from the brown trendlines and green arrows. A positive/bullish divergence occurs when the prices make lower lows while the RSI, or any other oscillator indicator, make higher lows. But a divergence cannot be taken as a confirmation of a reversal in trend. It only gives an indication that a change in trend may take place, whether it happens or not is for the market to decide. After all, there have been events in the past when the weather becomes all cloudy and dark and yet it does not rain.

Whether a low has been made in the short term or there may be more downside is difficult to say at the moment. It all depends on how the government, the opposition, the crude and the rest of the world behaves in the time to come. Any risk to the government will be taken negatively, crude continuing to fall will be taken positively while global sentiment will affect the Indian markets too in the same manner. What actually happens can be decided by the combination of all these factors and there is no point predicting the outcome of all of these situations. In times like these, just follow one simple maxim – “A trend is a friend and should be followed till the end.” And as of now (till the Nifty crosses 4215), the trend remains down.

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