Monday, August 25, 2008

Nifty May Perform Poorly

As expected, with global cues being strong, the Nifty did open with an upwards gap of about 70 points and then stabilized around those levels till about 12:30pm and then commenced falling. The fall was sharp and severe and the gap with which the market opened, was filled/closed today itself. The Nifty closed exactly at the same level as yesterday’s close and thus formed a gravestone doji. If one looks at the chart, it does not exactly look like a gravestone doji because NSE takes the closing price as the average of the last 30 minutes of trade. Taking actual closing prices of yesterday and today, one can realize that this is a gravestone doji. This is what Street Authority says about a gravestone doji.

As I said in yesterday’s post, the Nifty has been alternating between up days and down days since the last 5 days. Though, today also happens to be a day marginally in the green, yet a gravestone doji (or a candle with a long upper shadow and a small body) is a sign of weakness. This should bring the markets down and the Nifty may finally find support between 4150 and 4200. If 4150 is also broken on the downside, we should be looking at a target between 3800 and 3900. The trend, as yet is not clear. We are in a short term downtrend while the intermediate term is sideways. To predict/forecast analyse, what will happen in the short term and the intermediate term, I am doing the analysis on both the 30 minutes charts and the daily charts.

Nifty 30 Minutes Chart - Positive Divergence But RSI Finding Resistance at 60

Attached above is the 30 minutes chart of the Nifty. Seen on the chart is a trendline joining the different pivot highs and lows made during the month of August. Shown in the bottom portion of the chart is the Relative Strength Index (RSI) and superimposed on the prices is the Moving Averages Convergence Divergence (MACD). Let us discuss each one in detail and try and analyse which way the prices will move in the immediate short term. First, let us look at the RSI. The RSI today made a pivot high higher than the last pivot high which was made on 20th. The prices corresponding to these highs are seen making lower highs. Looking at the lows formed in the Nifty on 18th and on 22nd, the RSI at the same time is seen at the same level and is not making newer lows. So, as marked by the green arrows, there are two instances of a positive divergence occurring between the price and the RSI. But a divergence is just an indication of a reversal and not a confirmation. A confirmation will come if the trendline is broken towards the upside, i.e. if the Nifty were to go above 4370. If it turns back tomorrow and does cross 4370, it would also have made a small bullish head and shoulders pattern, the target for which would be close to 4520.

But like all coins, this has a flip side to it too. Coming back to the RSI, as marked in the circles, we can see that the RSI is finding resistance near 60, which is not exactly a sign of a bull market. Looking at the trendline, we can see that today was the sixth occasion that the Nifty tried to go above the trendline in this month but failed. Assuming that this would continue to provide resistance would be bearish for the markets. Also looking at the MACD which has been superimposed on the prices, we can see that unless the Nifty recovers drastically tomorrow, we shall get a sell signal from the MACD too.

Nifty Daily Chart - MACD Still Bearish, RSI Breaks Support

Above is the daily chart of the Nifty and an attempt has been made to study the intermediate term trend of the Nifty. As mentioned yesterday, the Nifty has now entered a sideways phase between 4200 and 4650 and would not give us a clear signal till it comes out of this range either on the upside or on the downside. If we have a look at the RSI, we can see that it has now broken the trendline which was providing support to it since the last few days and has bearish implications. These bearish implications would be cancelled if the RSI finds support near 40 and turns back. As far as the MACD is concerned, as mentioned in a post a few days ago, the sell signal which was generated is still valid and again has bearish implications for the markets. So, all in all, I am expecting the markets to perform poorly in the next 2-3 days.

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