Sensex and Nifty rallied from a support level we had identified in last week's column and has not paused at an area of congestion. Interestingly, Nifty has now turned into a stronger index than the Sensex over the past few days.
Support levels are areas where the demand for stocks exceeds supply leading to a rally in price. Resistance levels on the other hand are areas where the supply of stock exceeds demand leading to a fall in price. Let us look at the charts of the Sensex and Nifty to analyze and predict their price action. (See the two charts above)). The chart on the top is that of the Nifty and the one below is Sensex.
On the Nifty, the support level was between 5680 and 5740. For the Sensex, the level was between 19,270 and 19,450. Notice that both indexes fell into that area and then bounced. This was a strong support area due to the gap. The gap is shown by the white arrows on both charts. Gaps happen when the price closes at one level but opens much higher or lower the next trading day. Prices open higher due to extremely high demand. Once prices retreat to that level they either stop the fall or rally back up again. Last week the indexes rallied.
The strength of support at that area was enhanced due to the fact that it was a level of former resistance. Often when prices break out of resistance levels, they turn to support. This happens for two reasons. People who have shorted at previous resistance are waiting to exit their positions without a loss and hence the prices reach former resistance levels they buy to cover, leading to an upward pressure on price. Also people that missed out on the rally jump in to buy when prices come down to former resistance. The former resistance level is shown by red arrows on the chart. Notice that the resistance area and the gap are at the same price zone, making it a strong support.
Now prices at a congestion area has led to a pause in the rally. This is an area of indecision that prices could go either way. The congestion levels are marked by the ellipses on the chart. Notice that prices paused and moved sideways twice at that level. Once it paused and moved up and once it moved down. Let's wait and see what it does this time. If it moves up, the indexes can reach the next level of resistance shown by the red lines on the chart. A fall will take it down to the support levels shown by the blue lines. This is good time for longs to take at least partial profits and move their stops to break even levels if the bought at the support level we marked last week.
The US markets rallied on Friday and usually this leads to a rally in the Indian markets on Monday. However, we are not sure if that rule will hold true next week. This is so as last week when the US markets were falling the Indian markets were rallying. The inter-market connection is tenuous now.
The change in market in India is the relative strength of the Nifty and Sensex. For several weeks the Sensex was stronger than Nifty, due to which we would look at the Sensex to hit resistance to anticipate a reversal of the rally and for the Nifty to hit support to look for a reversal of a fall. Now with the Nifty gaining relative strength to the Sensex their roles have reversed. We feel the Nifty is stronger now as it rallied last week before filling the gap support level. The Sensex on the other hand went all the way into the gap before rallying again.
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Updated Date: Dec 21, 2014 03:44:04 IST