Wednesday, April 2, 2014

Nifty chart: a mid-week update (Apr 02 ‘14)


After a long consolidation within a ‘rectangle’ pattern, Nifty broke out upwards on a volume surge that validated the break out. Rectangles have measuring implications – as mentioned in a previous post: the height of the rectangle (about 400) is added to the break out point (about 6350) for a minimum upward target of 6750. This target has been met today.

Can the index move higher? Yes, it can. How much further can it rise? Note that after breaking out above the ‘rectangle’, Nifty immediately went into another consolidation within a ‘flag’ pattern. Volumes dropped during formation of the ‘flag’ – as it should. The upward break out from the ‘flag’ was also validated by an uptick in volumes.

Now, ‘flag’s also have measuring implications: the height of the ‘pole’ – measured from the start of the rally from the bottom of the ‘rectangle’ (about 5970) to the top of the ‘flag’ (about 6570) i.e. 600 points – is added to the break out point, for a minimum target of 7170.

Why ‘minimum target’? Because upward targets are often exceeded during bull rallies. Now you know why some experts have started mentioning upside targets of 7100-7200. When will the target be met? The way FIIs are piling into India, it can happen before the results season starts.

Daily technical indicators are bullish, but overbought. MACD, RSI and Slow stochastic are inside their overbought zones. ROC is showing negative divergence by failing to touch a new high with the index. Note that an index can remain overbought for long periods. But be prepared for some consolidation or correction.

Two things to avoid when the bulls are charging: (1) jumping in because you have missed the rally; (2) shorting the index in the hope of making a quick buck. Both can be very injurious to your wealth.

Stick to existing holdings and investment plans. Use the rally to get rid of underperforming stocks from your portfolio.


Hiren Banker said...

How long will this consolidation last - in terms of value or time ?


Subhankar said...

Good question, Hiren. Knowing the answer can make someone rich!

Since the index has just broken out after a long consolidation, any correction/consolidation now should be in the nature of short-duration profit booking.

Hiren Banker said...