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Nifty or Sensitive?

The India story remains the same. Both indexes are defined by the January 2008 pile driver low. The sudden retreat in the markets set the bedrock foundation for future falls. Both of the India indexes, the Nifty 50, and the SENSEX have reached the targets set by these pile driver lows. These are generally minimum targets and the SENSEX has dropped down to 14,600 before finding support.

Both indexes are dominated by a downtrend line. This has acted as a resistance level. The market rises to this resistance level and then reacts away, continuing the downtrend. The strength of the downtrend is confirmed with the Guppy Multiple Moving Averages (GMMA). The long term group is widely separated. Compression in the averages does not develop in response to the most recent rallies. This indicates that investors are still sellers. They are selling into the rally.

In this situation traders look for the historical support levels. As each rally fails, the market tests historical support. The SENSEX has support at 15,800, again at 14,600 and ultimately at 14,000.

The lower dip below the base of the pile driver pattern suggests the SENSEX can test support at 14,000. This may be a brief test as a final desperation shakeout of the market.

Traders will have a leading indication of developing trend change when the long term group of GMMA averages begin to compress as a rally develops. This will indicate that investors have become buyers.

This trend change relationship is clearly seen in the Reliance Industries chart. The long term GMMA compressed as the most recent rally developed and immediately prior to the breakout. Traders will watch for similar chart relationships in the Nifty and SENSEX as a leading indication of trend change.

The breakout above the trend line does not automatically lead to a trend change. The initial breakout rally usually fails. The index then uses the downtrend line as a support line. The index slides down the support line until it encounters strong historical resistance based on the levels mentioned earlier in these notes.

The India downtrend has not ended, but it is showing some indication of weakening. While we cannot eliminate the possibility of a sharp retest of historical support, we can be more confident that trend change is developing following the leading pattern shown by Reliance Industries.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

Asia Economy