Not done yet: Here's why the Nifty could bounce again

The Nifty has reached a support zone which is likely to stop and reverse the current fall. This is not one of the best support zones as it very high up on the chart and the market has not corrected much more deeply.

However, given the that the market is in a bullish trend this support level could very well stop the current correction.

Support levels are areas where the demand for stocks far exceed supply leading to a rally in price. Resistance levels are areas where the supply of stock exceeds demand leading to a drop in price.

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Last week we had mentioned that the Nifty is likely to correct and that’s exactly what happened. Now the index is at a support level which is likely to lead to a rally again. The supply areas are marked by white horizontal lines on the chart.

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One of the reasons we had predicted a fall in the market is due to the fact that we had negative divergence between the commodity channel index (CCI) and index. To read more about these factors check last week’s article.

The CCI is not approaching the oversold territory. Any reading below negative 100 is considered oversold. On Friday the CCI stood at 90.

The ideal time to buy is when the CCI goes below negative 100 and then rises above it. If the price at support when that happen, it is a stronger buy signal. The support zone goes all the way down to 6025.

It is very possible for the index to go all the way down to that level before it rallies. The Nifty closed at 6140 on Friday. If that level is broken the Nifty can go all the way down to 5750.

Remember the bullish run is dependent on the Federal Reserve printing money. But there are limits to what easy money can do. A prime example is Japan where equity markets rallied for sometime after the Bank of Japan eased monetary policy after the real estate crash led recession.

However, the equity markets since turned bearish for more than 20 years. Will that malaise affect the west?

There were no signs so far, except on Thursday when the European Central Bank cut interest rates. The equity markets rallied on the news, but then turned deeply negative at the close. The reason could be a market perception that easy money is losing its effectiveness and that economic reality will rear its ugly head.

However, on Friday positive news on the employment front in the US cheered the markets, erasing Thursday’s loss in the US. That rally could give a positive push to the Nifty come Monday.