Suresh Iyer, Technical Analyst, Asit C Mehta, said, the previous Fridays` relief rally was not sustainable this week. On Monday, the Nifty made a small consolidation for the big fall. On Tuesday and Wednesday, the Nifty nose-dived and took a pause on Thursday. On Friday, the downtrend continued further. The Nifty opened at 6,208.80 and made a high of 6,246.45. The Nifty closed at 5,705.30, lost almost 8% on a weekly closing basis. (Biggest weekly fall after the week ended on May 19, 2006).
The Nifty made low of 5,677 during the last week. FII`s selling in a big way led the fall. Global weakness due to the fear of US recession, added the salt to the wound. The fall got worse as volumes were on higher side. However, the Nifty January futures closed with 18 points premium to the spot Nifty.
Rationale
The Nifty witnessed fifth correction of the rally, which started since August 2007. All the previous falls were within the range of 8.8% to 11.60% from the relevant peak. This is the fifth fall with the loss of 10.7% from the all time high. On assuming that the Nifty`s bull trend to be intact, the fall may get arrested from within the range of another 1-1.5% from the last Friday`s closing. If the fall extends, the sanctity of the bull rally might come under question.
The Nifty during this rally was making higher top and higher bottom formation. (Once almost made a double bottom, during November 2007). Now it is testing the previous bottom of 5,676, so far. The trend line drawn from the 17th August 2007 might be a good support level for any fall. However, the Nifty had never tested this trend line during the rise. Presently the trend line support is placed near to 5,544.
Coincidentally, the 100-day simple moving average is near this level (at 5,521). The 89-day Exponential moving average is placed at 5,636 and the Nifty never closed below this average level during this rally. As 100 day simple moving average is far away from 200 day simple moving average, this level may act as good long-term support level.
In the daily charts, the Nifty closed decisively below the 50-day simple moving average for the first time, during the rally. The 5-day simple moving average breached 10 and 20-day simple moving average. One should note that the 5 day simple moving average never breached the 50-day simple moving average during this rally. Now the 5 day simple moving average (5,967) is nearing to the 50-day simple moving average (5,927).
In the daily charts, both the stochastic are in the deeply over sold zone. It may lead to a relief rally. The RSI is also at 32. The MACD, PSAR, ADX are in sell mode. However, the MACD is nearing to the zero line. Any reversal happens from here, it will lead to a fresh rally. On the other hand if it breaches the zero line, it will confirm the bull rally for the time being over and will initiate fresh down trend.
In the weekly charts, we find some fresh clues for the current down trend to continue. Since the week ended Aug. 31, 2007, for the first time, the Nifty closed below 10-week simple moving average. The Nifty breached PSAR in the weekly charts for the first time since September 2007. Both the stochastic, from the over bought zone, and generated a fresh sell signal. The RSI is in sell mode.
All the above warrants, the downtrend may continue further. However in the monthly charts, the bull rally is still intact.
Outlook
Nifty is testing the sanctity of the bull run
While commenting on the outlook of the market next week, Iyer said that, based on the above rationale, the daily charts shows the possibility of down trend gets arrested here or 1-3% down from here, before the fresh rally starts. However, the weekly charts are indicating the further down side, which needs further confirmation.
In the first case, the Nifty is expected to consolidate for the first three days in small range and the fresh rally can start afterwards. Any decisive fall below 5,638 and 5,538 will initiate fresh fall. On the other hand, any decisive close above 5,938, will initiate fresh rally. Until this any rally may be construed as a relief rally.
The Nifty has support at 5,676 (strong for short term), 5,638, 5,534 (on a closing basis) and 5,458, 5,216-5,281 (strong in the monthly charts). The Nifty has to face tough resistances during the rise. The Nifty has resistance at 5,736, 5,868, 5,934 (strong on a closing basis), 6,046 and 6,094.
Strategy
High-risk appetite can add long positions during the fall with the stop loss placed at 5,534 (on a closing basis) for relief rally. Fresh positions can be added after a close above 5,934 (on a closing basis). Rest of the traders and investors may adopt a wait and watch attitude.
Suresh Kumar Iyer
Technical analyst
Asit C Mehta Investment Intermediates
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