Update and Breakout in India Nifty 50 Index

Mar 29, 2010: 11:24 AM CST

Thank you to all the readers who have requested that I do occasional update posts regarding India’s “Nifty 50” stock market index.

There’s actually a new ETF now that allows investment/trading in the Index, and it trades under the symbol INDY, which I will be showing in a chart to highlight a potential major breakout that is occurring this morning.

Without further delay, let’s take a look at the weekly and daily structure of India’s “Nifty 50” and then the INDY for a potential major breakout… if it holds.

Weekly:

The two competing signals on the weekly chart are the negative momentum divergence (bearish non-confirmation) and the horizontal resistance line at the 5,250 index level (neutral).

Any breakout above  5,300 – taking the index into new recovery high territory – pushes the index into the “Open Air” zone, meaning there is no ‘obvious’ resistance between 5,300 and the all-time high of 6,250, implying that price could continue the rally eventually to test that high.

The NIFTY has overcome all prior resistance and negative divergences so far, so this would be the last major resistance line to overcome.  From a charting perspective, the index has ‘smooth sailing’ above 5,300… granted that a ‘bull trap’ does not occur.

Bull traps occur when price breaks an obvious resistance level, triggering short-sellers to cover (short-squeeze) while conservative/cautious buyers finally enter the market… but then price suddenly and unexpectedly reverses back down under resistance, trapping all those who just got long.  Those are always the risks with breakout trading tactics.

Next, the Daily Chart:

The striking feature to me is that the NIFTY is underperforming the US Equity Indexes on a relative basis, meaning that the S&P 500 (and 3 other indexes) have all broken to new recovery highs recently while the NIFTY is only at the prior high from early 2010.

Another negative divergence has also set-in and is ‘not confirming’ the recent rally to test the 2010 high.

Remember, negative divergences are only ‘caution’ lights and not ‘red’ lights, meaning they are a ‘take it slow’ signal and not a “run for the hills and exit or short-sell” signals.

A sell signal would form if price broke under the short-term trendline which now rests at the 5,175 level.

Given the resistance at 5,300, one would think the index would be heading lower.  However, as of Monday morning (March 29), we’re seeing the INDY ETF breakout to new highs on a gap move, which is often an early sign of impulse.

Finally, this morning’s ‘breakout’ in the INDY ETF:

The corresponding resistance level to 5,300 is $26.70 in the ETF, and price gapped higher this morning and sustained the breakout (as of noon, EST).

That’s a bullish sign and hints that we could see further gains if short-sellers are forced to take their stop-losses (short squeeze) and sidelined buyers rush in to take advantage of the breakout.

Again, be on the look-out for any bull trap (a move back under $26.70), but if that doesn’t happen, the index will likely continue rallying as before, breaking through resistance levels and overcoming negative divergences.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

(note – in StockCharts, the NIFTY is updated at the end of the day, while the ETF INDY updates immediately, which is why there is a difference between the two charts)

9 Comments

9 Responses to “Update and Breakout in India Nifty 50 Index”

  1. ealas Says:

    Hi, I'm constantly reading your blog and i'm really grateful for your job. It is really full of usefull info. So thanks!

    You've mentioned in your article that divergencion is only a “caution” signal. I'm just interested what are the “red” signals?

  2. TheYenGuy Says:

    The EUR/JPY rose taking oil, USO, commodities, DBC, base metals, BDG, gold, GLD, silver, SLV, palladium, PALL, copper, JJC, and the basic material stocks, IYM, as well the India commodity responsive ETF, INP, all higher.

    India, INP, shares are NOT in breakout; it is likely developing what will turn out to be an evening star pattern; this will require confirmation over tomorrow's trading.

    Metal manufacturing, XME, shares rose to the edge of a discending resistance line.

    Peru Copper, SCCO, rose to resistance.

    Copper, JJC, reflects irrational exuberance at the end of a bull market run.

    Palladium, PALL, jumped up near its recent high.

    Silver, SLV, rose to resistance.

    Today's move in the commodity stocks and in the BRICs is simply a “day yen carry trade”, reminiscent of the days when investors borrowed money from the Bank of Japan and for the longest time went short the yen and long commodities and the emerging markets causing a rise in Euro as well.

    All of the above with the exception of oil and gold, represent excellent short sellling opportunties, those trading the markets should sell into today's strength as we are at the top of a market that is turning bearish. Personally, I see a liquidity evaporation coming soon, as investors take flight from a falling bond and stock market where one will not be able to access one's funds in brokerage and money market accounts, therefore, I recommend gold coins, gold at BullionVault and in the gold ETF, GLD, in a trust account, not a brokerage account.

  3. * Fibozachi * Says:

    cleanest bull mkt on the planet (and the leader as well), good look Corey.

  4. Corey Rosenbloom, CMT Says:

    Elas,

    Divergences are only non-confirmations, but a 'red light' signals when a trendline or moving average is broken – and that hasn't happened yet so price should continue higher until the trendline or the 20 EMA is broken.

  5. tarique anwar Says:

    hey corey, can you also give a wave count on both the charts that you have shown about Nifty. your Indian reader.

  6. Jayesh Gala Says:

    Thanks for Nifty med term Update, Corey.
    Nifty is in 5th wave of advance (up sloping channel)
    NIFTY SHORT TERM
    Current rally from 4675 lows to 5330, 23.6% Fibonacci retracement @ 5175 and 38.2% @ 5080 (also the pre budget consolidation) are key levels.
    Bearish divergence and failure swing on RSI noted. Some weakness to 5175 – 5080 zones before the final thrust also seems a possible scenario. Weakness negated if Nifty moves and closes above 5330.

  7. sandew Says:

    Thank You, Corey. Always crisp and clear.
    One day I will visit the Expo just to meet you. Hope you will be able to spare some time. (not his year though)

  8. sandew Says:

    Thank You, Corey. Always crisp and clear.
    One day I will visit the Expo just to meet you. Hope you will be able to spare some time. (not this year though)

    Sanjeev – India

  9. momentumsignal Says:

    Thank you for covering the S&P CNX Nifty Index. In case readers are interested to get more analysis and daily updates on S&P CNX Nifty Index, please visit my blog which covers the Nifty futures and options at http://momentumsignal.blogspot.com/