Nifty support still intact, S&P breaks but forms a bullish candle

The support level on the Nifty is still intact and has not been tested despite the global sell off last week. The S&P 500, on the other hand, broke it's support level and closed below it only to form a bullish candle on Friday, indicating some upside in the near future.
Support levels are areas where the demand far exceeds supply leading to a rally in price. Resistance levels on the other hand are areas where the supply far exceeds demand leading to a drop in price. The negative headlines from China and from the US about the Federal Reserve possibly withdrawing its monetary accommodation sent global markets into a tailspin.
Despite the negative headlines the Nifty did not break its support level that we had mentioned last week. The support levels are shown by the two blue horizontal lines on the chart.
The chart on top is that of the Nifty and one below is of SPY, the exchange traded fund that tracks the mighty S&P 500.
A look at the chart will show that the Nifty has not fallen below its support level yet as shown by the blue horizontal lines. If that support level is indeed broken in the future, the index can go down to the next support level between 5210 and 5303. These are also marked by blue horizontal lines. However, it is important to note that the Nifty is now below its 50 and 200 simple moving average. The 50-day moving average stood at 5919 on Friday and the 200-day was at 5811, while the Nifty closed at 5667.
The moving average is shown by orange up sloping line on the chart.


While most people consider a fall below the 200 a symbol of the bear market, this is not always the case. The moving average also has to slope down which is not the case with Nifty. You will also notice that the Nifty had fallen below the 200 day moving average earlier but bounced back. It is possible for the index to do that once again and unless the support level is broken we'd not expect the index to fall further. An ideal place to short would be if the support breaks, the 200 day moving average slopes down and the index rallies to touch the down sloping average.

Now if the 200 aligns with a resistance level, it is a higher potential level to short. The resistance levels are shown by red horizontal lines above current price.
Let us take a look at the S&P 500, which broke the gap support level that we had marked last week. The support level is shown by the horizontal lines on the chart.
Ideally the SPY should have gone down to the next level of support shown on the chart between 153.54 and 155.37. However, on Friday it formed a bullish candle stick pattern called the dragon fly, which has a long tail and a small body. The candle stick is shown by the two white arrows on the chart. This candle stick pattern has come after a small, but not substantial fall in price, and may not be the strongest bullish signal.
However, until Friday's low is broken, we would not take a bearish stance.
One of the levels to short the SPY would be the 160 area, which was resistance, then turned to support and could not be resistance again as prices are below it. The next resistance level is marked by the red lines on the chart.
On a fundamental level, the market is showing as being addicted to the easy money from the Federal Reserve. Talks about the slowdown of the printing presses early this month led to a sell off. Then on Wednesday, when the Fed announced that growth is likely to pick up, it was seen by the market as a signal that the quantitative easing would stop soon. That led to a drop in equities and rise in bond yields.

The stopping of QE is having a negative effect on the equity and bond markets, which in turn could slow the economy down. That possibility makes it difficult to stop the printing presses. There is lesson that central bankers need to learn. It is easy to get on bull by printing money, but very difficult to get off the bull without getting hurt. Alan Greenspan's easy money led to the housing bubble, let's see what Bernanke's easy money, which is on a much larger scale, lead to.

Updated Date: Dec 21, 2014 04:42 AM

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