A close above 5,685 on the Nifty may bring some reversal

S&P Nifty close: 5,574.05

Market Trend
 

Short Term: Down                             Medium Term: Down                        Long Term: Down

After a flat opening, the Nifty made a feeble attempt to take out and close above the weekly pivot of 5,714 points, which failed miserably. After a couple of days of narrow-range movement the market declined with gusto in the last couple of days of the week. The breaking of the support of the weekly channel saw the bulls surrender meekly resulting in the Nifty just collapsing in the last 45 minutes of trade on Friday. The volumes on these days was significantly higher but the week-on-week volumes were significantly lower as the Nifty closed 112 points (-1.97%) in the red. The histogram MACD also fell below the median level indicating that the honeymoon for the bulls is over and desperate measures are required on their part to salvage the situation.
 

The sectoral Indices which outperformed were CNX Media (+3.56%), CNX Consumption (+0.55%), CNX Infra (-0.13%) and CNX PSE (-0.56%) while the underperformers were CNX Auto (-2.70%), CNX Metal (-2.45%), CNX Commodities (-2.37%) and CNX PSU Bank (-2.35%).

Some key levels to watch out for this week

•  As long as the S&P Nifty stays below 5,617 points (pivot) the bulls will be under pressure.

•  Support levels in declines are pegged at 5,516 and 5,458 points.

•  Resistance levels on the upside are pegged at 5,675 and 5,776 points.

Some Observations

1. The Nifty has completed the 61.8% retracement level of the decline from 6,338-4,770 points pegged at 5,740.
2. The 78.6% retracement level of the fall from 6,338-4,770 points is pegged at 5,951 points, which also coincides with the top of the channel (in brown).
3. We have fallen below the previous weekly top of 5,629 points (24 February 2012) which indicates that any rally from here on will lack impulsive qualities.
4. The “gap area” between 5,649-5,682 points has been closed hence the trouble for the bulls will increase.
5. The weekly channel support (in blue) has been broken. The immediate priority for the bulls is to regain it (has to close above 5,685 this week for it) otherwise the going will get tougher.
6. Immediate support to watch out for is 5,516 which is the 38.2% retracement level of the rise from 5,032-5,815 points. This level is close to the support calculated by another method i.e. correction from 5,348-5,032 points is 316 points. Therefore 5,815 – 316 points gives 5,499 points.
7. Another important level to watch out for is the recent top of 5,448 points (24 August 2012) which should not be overlapped at any cost as this would confirm that all bullish hopes are dashed and that any subsequent rise would only be a selling opportunity.

Strategy
 

The bulls came a cropper as the Nifty broke through and closed below the weekly channel support. This raises the question whether we have already topped out and an intermediate term decline has begun. To ward off such conclusions the bulls have to ensure that this correction does not drop below 5,448 points and more preferably try to regain the channel at the earliest. From this perspective the coming two to three weeks are important for getting a confirmation whether the bulls are down and out or they make one more last attempt to drive prices higher into the year end. However, from a practical short-term trading perspective one should keep selling into rallies near the 5,675-5,700 point’s area as the daily and weekly uptrend has become weak. From the above one can safely conclude that the bulls are down but not completely out as yet and one has to see what they can do to salvage the situation which would become precarious as the weeks go by.
 

(Vidur Pendharkar works as a consultant technical analyst and chief strategist at www.trend4casting.com.)