Wednesday, August 20, 2008

Some Positives, Some Negatives

Based on weak global indicators, the Nifty opened with a slight negative gap and for most of the day held and traded above the support of 4330. For a brief period of time, after 1 pm, it did go below 4330 to make a low of 4316 but soon recovered from those levels and the recovery at 2 pm was remarkable. Had it not been for the average calculation method of Nifty to calculate the closing price, we would have had another doji candle today.

Nifty Daily Chart - MACD Gives Sell Signal

Seen above is the daily chart of the Nifty. As suggested in yesterday’s newsletter the Nifty was likely to find support between 4330 and 4380 and though, it did overshoot the lower end of the target by about 15 points and eventually closing better, we shall consider it as a successful test of support. As can be seen on the chart by the dotted trendline, the Nifty did find support today near the line.

Also seen on the chart is the Moving Averages Convergence Divergence (MACD – not to scale), an oscillator indicator which gives excellent signals. It is calculated as the difference between two exponential moving averages of the prices, known as the slow and the fast moving averages. Usually the slow moving average is the 26 period moving average while the fast moving average is usually the 12 period moving average. This has been graphically illustrated as the brown line on the chart above. A 9 day simple moving average of the difference thus calculated is graphically shown as the red line and is also called the signal line. We get a buy signal when the MACD goes above the signal line while a sell signal comes when the MACD moves below the signal line. A quick look at the chart tells us that except for the month of February, this indicator has been giving pretty accurate and quick signals. The MACD has today given us a sell signal.

Well, we are talking of support and a short term turnaround and the MACD is giving us a sell signal? The European markets were down today by between 2-3% and the American markets are trading more than a percent in the red at the moment. Crude oil too jumped up today and after showing a high above $116 a barrel is currently trading in the vicinity of $114 a barrel. So, all global cues, as of now, happen to be negative and except for the technical reasons, there is no reason to expect a recovery. Technically also we have just mentioned that 4330 is a fairly strong support but it can easily be broken if the Nifty so decides. The MACD has also given a sell signal so the market may be coming down now. Well, what is the guarantee that the MACD will not function now like it did in February this year.

All in all, there are some negative cues and some positive ones. So, one should be cautious and let the Nifty decide what it wants to do next. A move below today’s low of 4316 (after 10:30 AM) should be taken as a bearish sign while a sustenance above 4330 should be viewed positively.

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