An ounce of bounce: Nifty seems poised to test 5,300 again

By George Albert

A mixed bag of missed and exceeded expectations have turned the equity markets bipolar, but the charts tell us that Nifty is aiming for 5,300 once more, if 5,267 level is cleared.

Investors have been whipsawed in the past few days. As the yields on Spanish bonds rose dramatically, the NIfty and other equity markets sold off. But readers of this column would have sold the Nifty much earlier when the index touched resistance levels. We had shown these resistance levels in our earlier columns. Please see the Nifty chart ( Click here for Nifty chart ) or the resistance zones. Resistance levels are zones where the supply of an asset exceeds demand, leading to a fall in price.

The head of the European Central Bank, Mario Draghi, stepped in and said he would do anything to save the euro, including buying Spanish bonds. This boosted the markets. The markets were also expecting the US Federal Reserve to ease monetary policy. The sugar rush led to strong rallies in the equity market. Then came the underwhelming reality, when the Federal Reserve and the ECB did nothing but offer more talk. The result was a selloff.

Next came the better-than-expected jobs number in the US on Friday which resulted in a 200-plus points rally in the Dow Jones index. The jobs number, though better than expected, did not help the unemployment rate which crept up to 8.3 percent from 8.2 percent, showing continued weakness in the US economy. The markets, however, rallied. The Friday rally in the US markets is expected to give a positive boost to the Nifty and Sensex on Monday.

The Nifty has been rallying after hitting a not-so-strong support level marked by the blue lines on the chart between 5,020 and 5,050. Support levels are zones where the demand for an asset exceeds supply, leading to a rally in price. Given the strong rally from that level the index can go all the way up to the 5,300 level. It, however, has to clear the 5,267 level before it reaches the 5,300 area.

The 5,260 level is important as it’s an area where a price gap begins. A price gap happens when the market closes at a certain level and then opens at a different level given an extraordinary demand-supply imbalance.

In the case of the Nifty, the index closed around the 5,306 level on 11 July and then fell the next trading day to open at 5,240. Then, on 13 July, the index went up to 5,267 and then dropped over the next few days to the 5,050 area. So now the gap is between 5,267 and 5,306, and if price rises above 5,267 it could go all the way up to 5,306.

Gold breakout fails

Last week gold broke out of the symmetrical triangle and was poised to rally. However, the precious metal fell back into its triangle. ( Click here for Gold chart ). With this price action the symmetrical triangle is no longer valid. However, the lower up-sloping line of the triangle could be used as support. If prices touch the line one could go long on the precious metal.

Dollar-Rupee

The selloff in the dollar index has given the rupee a breather. The Indian currency will be range-bound between 54 and 57.50 for a while unless something dramatic happens. An easing by the Federal Reserve, expected in September, will be a positive for the Indian rupee. The rupee also has a smaller range between 55 and 56.50 that it could move in. Traders could buy or cover short positions at the bottom of the range and sell or short at the top of the range. Keep an eye on the 81.75 level on the dollar index, which is a strong support area that could lead to a bounce in the greenback. The index closed at 82.38 on Friday.

George Albert is Editor, www.capturetrends.com