India’s NIFTY Bounces off Confluence Support July 18

Jul 18, 2009: 5:40 PM CST

India’s “Nifty 50” stock index gave us all an example of how to identify confluence support and what happens when price pulls back – especially from a bear flag – into this level.  Let’s learn a few lessons and look at what might be ahead.  For those of you who don’t follow India’s markets, this chart contains valuable lessons for you as well.

NIFTY Weekly Index:

The 4,000 Index level provided support for this week’s powerful 370 point or 10% rally off that level.  We’re slightly below where the prior week closed, as we lost 10% that week… so price is back to where it started in early July.

I mentioned in my last Nifty Index Update (July 4th) that odds were ripe for a correction, and that I view the whole structure as a larger corrective move (reference that post for the monthly structure).  The initial ‘next swing’ target was this confluence support level, which we have now achieved and held.

In terms of lessons, notice how we identified confluence support by noticing that the 200 week and 20 week moving averages converged at the same level, with the 50 week just below it – moving average convergences are almost always targets to play for, and areas to expect for support (that logic sets up the ‘cradle trade’).

It just so happened that price is bouncing off the 61.8% Fibonacci grid from the highs to the lows (I sometimes draw Fibonacci grids inverted).  This is using the ‘closing price’ method to originate the grid, which often gives better results than spike highs or lows.

Also, 4,000 on an index is psychological “round number” support… all of these held the price last week and set the stage for this week’s bounce.

Let’s drop to the daily chart now.

NIFTY Daily Index:

The lesson to learn from the daily chart is that price formed a significant Negative Divergence that preceded the recent correction down into the 4,000 area.

Also, we have completed an almost perfect Bear Flag down into this level, which also provided a basis for why price was likely to bounce – the price projection level of a bear/bull flag often provides a turning point in markets.

The level to watch closely in the Nifty is 4,500, as that would break above the ‘flag’ of the Bear Flag and would create a higher swing high which could open up a ‘magnet trade’ to the 2009 highs around 4,700.

Like most global markets, we observed a powerful swing up this week – we’ll have to watch closely for continued strength, but again, watch how price reacts to the 4,500 for clues.

If it fails to break above 4,500, then we are still in perhaps the early stages of a down-move.  A break above 4,500 would almost certainly set up a test of the 2009 highs.

For those interested in a broader perspective, I now offer the weekly “Intermarket Technical Reports” (click for more information) which take a top-down monthly, weekly, and daily structural view of key markets and highlight areas to watch, opportunities to play for (on given timeframes), and lessons as I observe them in Bonds, Gold, Stocks, Crude Oil, and the S&P 500.  Thank you to all subscribers and I would love to have you as well as a member!

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Corey Rosenbloom, CMT

7 Comments

7 Responses to “India’s NIFTY Bounces off Confluence Support July 18”

  1. T Says:

    Nice analysis Corey. Learning a lot from your blog. I have started using the 3/10 oscillator in my trading and so far liking it. I have a couple of questions and will appreciate if you can spare some time to answer them.

    i. If oscillator makes a new momentum high but price has not yet made a new high – what does that mean?

    ii. If you see 1 min. chart of ABX on July 18 from 14.45 – 16.00 pm: Around 15.00 oscillator made NML indicating lower prices yet to come. Around 15.40, we get another NML but price now reverses. I was holding a short position in ABX and was expecting more lower prices and was stopped above 50 MA. Was I reading the oscillator incorrectly?

    Thanks

  2. sandew Says:

    Corey Hi,
    Greetings from India.
    From the Flag High of 4470 to the Low of 3910 on July 10, Nifty has now retraced 78.6% Fibonacci now resting at 4367. This retracement has been on decreasing low volumes (hourly chart) vis.a.vis. the fall seen in preceding week. MACD momentum 3/10/16 is in divergence. STS is in 90s, RSI in 70s, adx above 40. nifty resting on edge Bollinger 20,2. Sure 20 ema is marginally above 50 which is just alongside 34. It appears an overbought market on charts. Do you agree ?

    The news momentum, for non-India readers, is that Govt. intends to partially sell off Govt companies shares to contain fiscal deficit, the possibility of Hilary Clinton now visiting India announcing Nuclear Power contracts coming Monday. all supported by the global equity surge. Results season continue mixed into next week.

    On daily chart, though the RSI, STS, ADX are not overstretched but the divergence in 3/10 and the volume decline remains.

    How do we read the charts for Monday, the same conundrum Dow watchers encounter this weekend ?
    Sandew
    New Delhi

  3. Bhupesh Says:

    Thank Corey,

    Bhupesh

  4. Corey Rosenbloom, CMT Says:

    Thanks, T!

    There are two ways to look at this – according to Connie Brown, this might be a sign of a “Negative Reversal” meaning that when the next downswing begins, it will be more forceful than normal.

    The other way is to see it as a 'hidden' sign of strength in that at the end of a bear market, we will see a sharp up-burst that will take price suddenly up (but not to a new high) which creates a new oscillator high (remember it's the difference in two moving averages) and you'll often see these 'bursts' at the beginning of new bull markets.

    Second, your interpretation was correct but remember that we can see increased noise or random volatility into the close – I'll often not trade the close for this reason – I tend to focus on the morning. Most likely, it would have led to continuation any other time of the day except the close.

  5. Corey Rosenbloom, CMT Says:

    Sandew,

    Yes, like most markets, India's NIFTY is overbought on the daily frame but that alone is no reason to sell in isolation – overbought conditions can continue.

    I would either wait for a pullback to get long or at least anticipate overhead resistance as the current swing is overextended. That's the easy answer, but it also seems to be the highest probability.

    Glad to have you from New Delhi! Thanks!

  6. T Says:

    Thanks Corey. Appreciate your response.

  7. T Says:

    Thanks Corey. Appreciate your response.