Nifty chart: a mid-week update (Jul 23 ‘14)

Stock markets have this uncanny habit of knowing exactly what everyone wants and expects to happen, and then doing the complete opposite – leaving experts and small investors frustrated, baffled and searching for explanations.

Everyone was expecting a deeper correction from the Jul 8 ‘14 top of 7808 – at least to the ‘gap’ zone formed on the Nifty chart (below) on May 13 ‘14. That would have improved the technical ‘health’ of the chart and provided a buying opportunity to many who have missed the entire rally since the Aug ‘13 low (marked by Up trend line 2).

Instead, Nifty took support from its rising 50 day EMA and rallied to new intra-day and closing highs today. If you have been waiting for a deeper correction to buy, you may have missed the bus. Don’t lose heart. Markets have a strange way of providing many chances to enter.

For bulls, there is plenty of good news. FIIs are back in ‘buy mode’, and have so far net purchased worth Rs 8500 Crores in July. DII net selling worth Rs 4700 Crores haven’t quite kept pace with FII buying. So, who sold the rest? You tell me.

All three EMAs are rising and the index is trading above them in a long-term bull market. Daily technical indicators are looking bullish but not overbought. That means there can be more up side in the near term.

Bears are not going to throw in the towel just yet. Note that volumes have been sliding since the upward ‘gap’ got formed more than 2 months ago. All four technical indicators touched lower tops today while Nifty touched an all-time high. The combined negative divergences may lead to a correction or consolidation.

By touching a top that was less than half a point higher than the Jul 8 top of 7808, accompanied by lower volumes, Nifty may be forming a ‘double top’ reversal pattern. The pattern will get confirmed only if the index falls below the July 14 low of 7422 (‘valley’ between the two tops). Should it do so – and I am not saying it will – then the downside target will be in the middle of the ‘gap’ zone.

Don’t jump in with both feet. Nor should you keep waiting for a correction. The trick to making money in the stock market is to choose fundamentally strong stocks and keep adding to them on a regular basis as per proper financial and asset allocation plans. As simple as that.