Sunday, September 21, 2008

Minor Resistances Close By, Short Term Trend Up

The Indian markets saw two days of amazing gains when all the world markets were displaying weakness. Bad news now does bring the markets down but the markets are not being able to sustain the weakness. The bulls have a clear advantage now, at least in the short term. On Friday the Nifty opened with an upward gap of about 100 points and surprisingly continued in the same direction. Friday, in fact, was a good day for all markets over the world. The Asian markets were between 4% and 10% up with Hang Seng leading the pack with gains of 9.61% and Shanghai following a close second with 9.46% gains. The Indian markets, as we all know, were more than 5% up with Nifty closing with gains of 207 points and BSE Sensex jumping 726 points. The European markets also closed with gains between 5 and 10% with the French CAC jumping 9.2% and London FTSE gaining 8.8%.

Nifty Daily Chart - Resistance at 21 day EMA

Seen above is the daily chart of the Nifty, which shows the big jump in the last two days. 450 points in 2 days. This rally came after the head and shoulders target was achieved at 3800, which also happened to be a major support as the lowest low (actually 3790) formed in recent times (July 2008). A rally should have come back and found resistance near the neckline at 4200 but there was not even a hint of resistance at those levels. The Nifty easily crossed 4200 and after making a high at 4262, finally ended the day at 4245. There is some bit of resistance near current levels at 4250, at 4300 and then 4350. A major resistance comes in at or near 4500. An indicator added on the charts today is a 21 day exponential moving average which usually gives very good support/resistance levels in trending markets. This can be seen on the chart shown above too. The 21 day EMA level for Friday was 4264 and the Nifty made a high of 4262.65. Coincidence? No, it happens a number of times. If this indeed is a trending market then a break above this should be decisive. Not only that, it will also then act as a support if the price were to come down. But what if it is a sideways market? Well, then we should see the price coming down below it soon enough. The moving averages have also proved, time and again, that they are useless in sideways markets.

Now since 4200 was a significant level for us and since the price has now managed to move above it on Friday, it should now act as a good support for the Nifty. One could consider buying in the short term with a stop loss at 4200. One may think of using the ‘trailing stop loss’ technique as each level of 4250, 4300 and 4350 is ticked off by the Nifty. Consider exiting beween 4450 and 4500.

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