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Wednesday, August 6, 2014

Nifty chart: a mid-week update (Aug 06 ‘14)

The RBI governor expectedly kept interest rates unchanged. Keeping inflation under control has been his (and his predecessor’s) priority. The SLR rate was cut by 50 bps (0.5%) to inject more liquidity in the banking system. But that is unlikely to have any effect in the near term because credit growth hasn’t picked up.

FIIs have been net buyers this week. Even DIIs were net buyers on Tue. and Wed. But while Nifty closed higher yesterday, it closed lower today. LIC will have an investible surplus of Rs 3 Lakh Crores (how many zeroes after 3 does that have?) this year – of which 15% (about  Rs 45000 Crores) will be invested in equities by Mar ‘15. Are you still worrying about a huge correction?!

After forming an upward ‘gap’ (marked by dotted lines) on May 13 ‘14, Nifty has been trading within an upward sloping channel for almost 3 months. The lower edge of the channel has merged with the 50 day EMA, whose current level is about 7530. So, keep a watch on that level (on a closing basis). A downward breach may cause a test of the ‘gap’ area – which has remained untested so far.

Nifty_Aug0614

The up trend line 2 (in blue) and the 200 day EMA are rising together and are currently below the ‘gap’ zone. They should provide stronger support in case Nifty drops down to fill the ‘gap’ – though the chances of that happening seems low at this stage. The only cause for such a drop could be some external factor.

Volumes have been sliding as Nifty has moved up within the channel. That is a negative divergence, because a bull rally requires volume support. Daily technical indicators are also showing negative divergences by failing to touch new highs with the index. Does that mean a big correction is around the corner?

As George Gershwin wrote: It ain’t necessarily so. Though the indicators are looking a bit bearish, suggesting further downside in the near term, index valuation suggests that any dip will be bought into. So, Nifty may end up consolidating sideways with an upward bias for a while before breaking out higher.

So, what are investors supposed to do? It isn’t necessary to always do something. Some times just sitting back and watching can be useful. Stick to your investment plans, instead of getting excited or disheartened because some stocks are shooting up while others are stagnating. That is the nature of the market.

The long-term trend is up, and in an up trend you make money by entering at a fair price and then holding on – using dips to add. Some times, the urge to take profits is too strong to control. Book part profits and hold the rest with a trailing stop-loss. Otherwise you may miss a multibagger opportunity.

The really big gains come when you enter fundamentally strong stocks at a decent price and then control the urge to book profits at every 30-40% rise.

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