Lessons and Analysis on India’s Nifty Index May 25

May 25, 2009: 3:51 PM CST

Along with many other traders, I have been impressed with the strong action in India’s “Nifty 50” Stock Market Index lately.  Let’s take a look at the daily and weekly chart to see the structure and learn some valuable quick lessons.

I have highlighted the ‘rectangle consolidation’ numerous times in past posts on the Nifty index, applying simple, classical Technical Analysis by saying:

“In my experience, it’s best not to get fancy inside a lengthy flat consolidation – your best odds come from waiting for a break-out from consolidation before getting involved with a trade. [T]he structure is clearly defined and the implication is that once price breaks out of the rectangle (be it on the upside or the downside), then odds favor a trend (or momentum) move to carry in that direction for some time.  Until then, odds favor waiting for the break or risk getting chopped around too much in your trading.”

We got that breakout – to the upside – in April and sure enough, price has ejected upwards (out of a demand/supply imbalance) in a momentum move that has surprised many investors.

I prefer to enter breakouts when price pulls back (retraces) to test the breakout zone which didn’t really happen, though we did get a slight pullback before price began the second phase of upward momentum in May.

India’s Nifty Index has been showing relative strength to the S&P 500 ever since the October lows and – with the exception of the rectangle – hasn’t looked back since.

We’ve made two new momentum highs on the 3/10 Oscillator which hints that higher prices are perhaps more likely yet to come, but we’re due a pullback to retrace part of the massive gain that arose from the recent election gains.

Let’s step up our time horizon to see the weekly chart and trend structure.

Observing the Fibonacci grid from the 2008 price high at 6,250 to the key support low at 2,570, we see that price retraced cleanly to the 50% Fibonacci retracement at roughly 4,470 which was also prior support on the March lows (and resistance at the July 2009 highs and July 2008 highs as well).  Thus, the 4,470 level holds key significance to the market in terms of likely overhead resistance that must be cleared.

Notice that, surprisingly with the recent strength, the 3/10 Oscillator failed to achieve a new momentum high (it did not surpass the 500 level hit in October 2007) though it has made a new weekly momentum high not seen in almost two years.

The moving average structure – which always lags price – is still in the most bearish orientation possible (20 under the 50 which is under the 200) though we’re seeing the 20 EMA race up to break above the 50 EMA soon, provided that price holds above the 50 EMA over the next few weeks.

The fact that price broke so strongly above the 50 week EMA is significant – I figured we’d get at least a pullback off this level to retest the 20 EMA, given there was a red doji at this level last month that I highlighted in a post. That serves as a reminder that we deal in probabilities, never certainties, and that markets are governed by supply and demand, not magic technical indicators.

Let’s keep watching this powerful index to see if we can sustain these higher prices (which now seems likely) and note how far sellers bring the index down on any sort of expected pullback.

Corey Rosenbloom
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

6 Comments

6 Responses to “Lessons and Analysis on India’s Nifty Index May 25”

  1. ashu Says:

    17% in one day was too much for me upswing in favorable govt condition. However, there is a critical Budget in 45 days which may define course for next year, some expectations of Labor laws reform, insurance, banking aviation , pensions ,disinvestment of public enterprises to fill deficit hole …. etc.etc.. reforms are on cards rather the whole works of indian economy 😀 will be overhauled.

  2. Da_bears Says:

    if applying EW. we would have a 1 in april of 08 followed by 2 with next high, then 3 is at lows and then potential the 4 is where we hit 50% retracement is that correct? so we are now in 5

  3. Lessons and Analysis on India’s Nifty Index May 25 | Penny Stock Trading System Blog Says:

    […] Let’s step up our time horizon to see the weekly chart and trend structure (continue reading). […]

  4. Bh Says:

    you find a the very good explantion to the same pattern on http://tradingstocksontechnicals.blogspot.com/

    check this out. let us know if that is right

  5. Neil Says:

    Hi Corey ….. I would really love to know your EW interpretation on the daily charts of Nifty, after this helluva move up. I'm all confused with EW counts , cos nifty has closed for 3 days now above the supposedly primary wave 1 low i.e. 4470 .. so as Wave 4 cannot overlap wave 1, so my preffered count goes out of the window that this was a corrective primary wave 4. Can u pls suggest a decent alternate count. .

    Thanx in advace

  6. Neil Says:

    Hi Corey ….. I would really love to know your EW interpretation on the daily charts of Nifty, after this helluva move up. I'm all confused with EW counts , cos nifty has closed for 3 days now above the supposedly primary wave 1 low i.e. 4470 .. so as Wave 4 cannot overlap wave 1, so my preffered count goes out of the window that this was a corrective primary wave 4. Can u pls suggest a decent alternate count. .

    Thanx in advace