Demand zone in S&P 500 stops global bear and rescues Nifty for now

The global bear has taken a breather as the S&P 500 hits a strong support zone and is able to sustain the support. The result is a rally in the Indian markets and also other indexes in Eurozone nations like the UK, France and Germany.

Support zones are areas where the demand for stocks far exceed supply leading to a rally in price. None of the major indexes except the S&P 500 hit support but it was able to stop the steady bleeding of the other markets. The same is true of the Nifty and Sensex. Both indexes were far from their respective support zones, but they still rallied as the S&P 500 sustained support.

Let us look at the combined chart of the Nifty and S&P 500. The chart on the top is that of the Nifty and the one below is of SPY the exchange traded fund that tracks the might S&P 500.

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[caption id=“attachment_873359” align=“aligncenter” width=“600”] Chart View[/caption]

Notice that the S&P 500 hit its support zone, but the Nifty is far from it. The support zone for the S&P 500 is the gap and also the previous high, which was resistance. Usually previous resistance often turns to support, when prices rally higher than the resistance level and then retrace back to it.

In fact in the case of the S&P 500 the index gapped higher than the resistance zone and kept going higher. Gaps happen when price closes at one level and opens higher or lower on the next trading day. If prices open higher the next day the gap is an area of excess demand and if prices open lower it is an area of excess supply. A gap happens as demand is so high and supply very low that price has to move drastically up entice sellers. The buyers who did not get a chance to buy earlier jump in to buy when price comes back to the gap support level leading to another rally in price.

Notice that the S&P 500 came down to the gap level and bounced on June 6, showing that the support was valid. Then the index sold off again and close to the gap level one more time and rallied. But this time when it rallied the index made a higher low than the June 6 low. A higher low which is bullish signal is made when the latest low in price is higher than the previous low.

Now let us look at the Nifty. When the S&P 500 bounced on June 6, the Nifty stopped falling and moved sideways. The Indian markets did not believe that the rally in the S&P 500 was sustainable. Then on June 10 when the S&P 500 fell again so did the Nifty. However, on Thursday when the S&P 500 made a higher low and had a strong rally, the Nifty followed on Friday.

So what’s next. Notice that on both the Nifty and S&P 500 chart we have shown red lines which are resistance zones. Resistance zones are areas where supply of stock far exceeds demand leading to a fall in price.

The S&P 500 needs to break out of it’s resistance zone, for Nifty to go higher. However, a policy boost from the Reserve Bank of India could also push the Nifty higher. On the other hand if the S&P 500 falls and goes deeper into the gap support level, we could see the Nifty follow and go down its support level. Right keep an eye on the support and resistance zones marked on the S&P 500 charts. A break above or below could give a indication of the future direction of the global markets.