The uptrend of the Nifty is still intact but it faces a few hurdles along the way. As many investors know the markets move down in a straight line but in a impulse and correction sequence. And right now based on a few parameters the Nifty may be due for a correction or sideways movement.
Before we look at the chart, let’s take a brief movement to understand the impulse correction sequence. In a bull market, the impulse of the market is up and the correction is down. An impulse is identified by the strength of the move. So in a bull market up moves are stronger and down moves take a longer time. The hurdles that the Nifty faces are in terms of resistance in price, resistance in the Bollinger Bands and a weakening of the uptrend shown by the commodity channel index.
Resistance levels are areas where the supply of stock far exceeds demand leading to a drop in price. The resistance in price is essentially the high that NIFTY made in May this year. The high is shown my a white vertical line.
[caption id=“attachment_1181789” align=“aligncenter” width=“600”]  Chart[/caption]
Prices are pretty close to that level. Since the Nifty sold off from that level it is likely to do so again. The sell off may not be as deep, but the probability of prices heading lower is high. The May 2013 high is around 6225 and the Nifty closed at 6189 on Friday. The reason prices fall from previous drop levels is because there are a lot of trapped buyers who want to get out. These buyer have gotten into long positions at the drop point and will get out of them when they see they are at break even. Also short sellers too like to pile on at the drop off points. Finally buyers who entered at lower prices tend to book profits as price nears previous areas of fall.
The positive factor for the bulls is that prices have come close that level a few times and sold off. Each time the price comes up to a resistance level it absorbs willing sellers and after a certain point there are no sellers left which leads to a break out in price.
Now let us look at the commodity channel index (CCI) at the bottom of the chart. The CCI shows overbought and oversold conditions in the market as well as strength in the rally. When the CCI is above positive 100 it shows and ovebought condition and when below negative 100 it shows an oversold condition. Now to see the strength of the rally one has to check if the new highs in the markets are resulting in new highs on the CCI. This confirm the rally. However, if the price is moving up and the CCI moving down like it is with the Nifty chart, it is called negative divergence. A negative divergence shows the uptrend is weakening and the price is likely to fall soon.
Finally let’s look at the bollinger bands as shown by the curving blue lines. The bands show a extension of price from a average and when prices rally too far from the average they tend to be pulled back. Prices moving outside the band is considered an over extension that often leads to a reversal. Note the green and red arrows on the chart. Those are areas where the Nifty either touched or went outside the bollinger bands. You’ll notice that prices often reverse after touching or going outside the band.
In last week’s article we talked about the bullish cup and handle chart formation which could lead to a 1000 point rally on the Nifty. That scenario is still intact, perhaps after a correction. Once the Nifty clears the May 2013 high the next resistance in price is the all time high of around 6350. The clearing of these levels then increases the potential that the Nifty will make the 1000 point move.