Charting Asia

Nifty key to uptrend in Indian stocks

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India's benchmark Sensex stock index may have broken out to new highs, but for a sense of what's next for the share market, investors might want to take cue from the broader Nifty index.

While the Nifty Index is lagging, it tends to be more reliable for tracking the behavior of the Indian market. The weekly Nifty chart gives an overview of market behavior and provides a method for setting the breakout target.

The first feature of the weekly Nifty chart is the long-term trading band consolidation. The upper level of the band is near 6250, while the lower level is near 4610. The index has oscillated around the central trading band between 5200 and 5680 for almost three years. This is an important behavior because it provides a method for calculating breakout targets.

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The second feature of the Nifty chart is the width of the trading bands, which are around 507 index points wide. The width is projected above the upper edge of the trading band to give an upside target near 6780. If the breakout above 6250 continues then 6780 is the next potential resistance level, but that's a big if.

The Nifty has been in a general uptrend since January 2012 but this uptrend has been erratic. There were substantial dips in the trend in April 2013 and more recently in August 2013. These dips are not the usual behavior seen in a strong trend.

Additionally the Guppy Multiple Moving Average relationships also show some trend weakness as they are not widely separated.

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These features suggest there is a reasonable probability that a breakout above the previous all-time high is would be a temporary rally that has over-shot the long-term resistance level that creates the upper edge of the trading band.

The key development would be when the rally retreats and uses the 6250 as a support level prior to a new rally rebound. This behavior would confirm the breakout is genuine and that the uptrend has a higher probability of continuing. The SENSEX may move first, but confirmation will come from the behavior of the Nifty index.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.