Nifty broke out of its resistance level on Thursday and seems headed to the next zone between 5,862 and 5,940. The rupee, meanwhile, continues its march to the 48-49.50 level against the US dollar powered by the reforms announced by the government.
Resistance levels are areas where the supply of stocks exceeds demand and support levels are zones where the demand for stocks exceeds supply. Once a resistance level is broken it is no longer an area of supply and often turns into an area of demand.
In last week's article we had mentioned that the bulls were in control, but that the market could go higher only if it closed above 5,738. Last Thursday, the Nifty went all the way up to 5,807 before closing at 5,787. Friday gave an opportunity for bulls to buy again when the index went lower. Usually when markets rally and break out of resistance, they correct and test the former resistance level before rallying again. The rally happens because the former resistance level, once broken, turns to support. A look at the chart (Click here for chart) will show the breakout of resistance and then the pullback. (Note: Please ignore the long tail on Friday's candle, it is a data error.)
The problem right now for Nifty bulls is that the next resistance level is very close, making the index highly susceptible to a selloff. Hence bulls should work with decent stop levels to minimise losses, but they should also make sure of not getting stopped out too early. For a stop we'd ideally look at 5,636 as it was the last pivot area from where the Nifty rallied higher. Additionally it is also a previous resistance area that turned to support, which is shown by the blue horizontal line. The red arrows show the resistance level and the blue arrow shows the switch to support. It is a very wide stop, but that's what the chart says is a good level for a stop.
Again, if you were not in the market at the 5,200 level we had mentioned in our previous columns, then you are too late now. Now should be the time to take profits or move your stops higher to lock in your profits. The next resistance level between 5,862 and 5,938 is a good level to short as the Nifty has not tested that resistance. The first time the index reaches a resistance level mostly results in a fall in price. It is what traders call a high probability trade.
As a trading strategy we'd say that bulls should be taking profits or at least moving stops higher to lock in their existing profits. Bears should wait for prices to hit the resistance zone before shorting. Since the resistance zone is wide, one could ideally scale into a position as the Nifty rises higher inside the level. Perhaps one can buy one contract at 5,862 and the rest as prices go higher. The other option is to let prices go into the level and short once it begins to fall and comes out of the level as it shows that the market is turning. The stop, of course, will be above the resistance zone.
The INR continues it's rapid march to the resistance zone of 48 to 49.50. This level was the area from which the eupee began its descent to 57. The announcement of more reform has provided a boost to the rupee along with the weakness in the US dollar. The greenback's weakness has, of course, been driven by the Federal Reserve Bank's policy to further ease money supply.
We feel that the rally in the rupee has more to do with the fundamental strength of the INR than the weakness in the US dollar. A look at the dollar chart will show that the greenback had a small bounce recently from a support zone, but the rupee continued to appreciate. However, note that the dollar is coming back to its support level again, which could lead to another bounce and possibly reverse or slow the rupee rally.
If the dollar comes to its support at the same time the rupee touches its resistance between 48 and 49.50, there is a higher probability that the INR will depreciate.
George Albert is Editor, www.capturetrends.com