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)