Just when you thought that the Nifty will rally after breaking out of resistance, the Sensex comes up close to its level of resistance. This makes a further rally in the markets challenging.
Resistance is the level where the supply exceeds demand leading to a fall in prices. Support on the other hand are areas where the demand exceeds supply leading to a rally in price.
Let us take a look at the combined chart of the Nifty and Sensex ( See chart above). The chart on the top is that of the Nifty and the one below is that of the Sensex.
In our article of June 29, we had mentioned that the Nifty is near a resistance zone which needs to be cleared before a further rally.
Notice that the Nifty has broken above the blue box, which ideally should have resulted in the index going up to the next zone of resistance marked by the red horizontal lines on the Nifty chart. However, notice that the Sensex is already very close to its resistance level making a further rally in the Nifty challenging. The Sensex and Nifty affect each other and if one reaches resistance and the other does not, it is likely that both will move sideways or fall.
Even if the resistance zone marked by the red lines is broken there is one more key level of resistance shown by the white line on both the Nifty and Sensex. Now if the indexes move sideways for sometime at the resistance zone marked by the red line, the chances of a breakout are higher. The reason for this is simple. When prices keep hitting the resistance level multiple time, it shows that the buyers are absorbing the excess supply. Once the supply is exhausted prices tend to break out and rally further. But keep an eye on the white horizontal line, which is another area of resistance.
One of the reasons for the rally is the calm in the bond markets. After the initial panic that the Federal Reserve will wind down the monetary spigots, the central bank officials walked back on the statement saying that they were in no hurry. Also the 10-year US treasury (UST) was close to support. A consequent rise in the UST prices and fall in yields provided a boost to the bullish sentiment in the equity market. But one must note that that the rally in equities is not supported by an equally strong rally in the UST.
UST prices still remain weak, but unless the support level shown in last week article's chart is broken, we will not see a strong sell off in bonds. A sell off in bonds can be a trigger to turn the equity markets bearish again. The market right now presumes that the Federal Reserve is in no hurry to reduce its monetary expansion. This is expected to provide the necessary fuel for equity bulls. The market also feels that even if the easing is tapered off, there is enough liquidity in the system to support the equity markets.