Nifty chart: a mid-week update (Aug 20 ‘14)

FIIs have been net buyers during the first three days of this week. DIIs were also net buyers on Monday, but turned net sellers on the next two days. The net result of all this buying and selling was that Nifty touched a new lifetime closing high of 7897.50 on Tue. Aug 19.

Apparently, some FIIs are disappointed that even after spending 3 months in office, the Modi government has failed to announce any big-bang reforms that could have propelled the index even higher.

The blocking of the insurance bill in the upper house has probably caused this policy reticence. BJP does not have the numbers in the Rajya Sabha to pass any controversial bills. Upcoming elections in a few states may have added to the cautious approach.

However, enough indications have been given about what the NDA government wants to achieve in the near term. Election victory in some of the larger states may lead to an acceleration in the reforms process.

Nifty continues to TRADE above its three EMAs in a long-term bull market. The up trend line 2 has now merged with the 200 day EMA. Another intermediate up trend line, connecting Nifty lows since the general election results were announced, has merged with the 50 day EMA.

The current levels of the two trend lines are at about 7600 and 6920. Just above up trend line 2 is the 47 points ‘gap’ zone (see chart in this post). Those are the likely support levels in case there is a correction.

Discussing a correction when Nifty has just touched a lifetime high may seem pessimistic. But remember Buffet’s 2 rules of INVESTING. Preservation of capital is more important than chasing after the last ounce of profit.

Sliding volume bars is a contra-indicator to a sustainable rally. Negative divergences in all four technical indicators, which have again failed to touch new highs with the index, is another concern for bulls. So far, Nifty has thumbed its nose at all the contra-indications to rise higher.

The gradual up move, interspersed with small corrective moves, have kept the Nifty chart technically ‘healthy’. That has allowed company earnings (E) to catch up with the rise in index valuation (P/E) – keeping current valuation around the long-term average.

In other words, Nifty’s rally is likely to continue without reaching euphoric levels. External events can undermine the clear domination by bulls. While such events can’t be predicted in advance, sticking to planned INVESTMENTS and maintaining a trailing stop-loss may let small investors sleep better at night.