Weekly Outlook of Nifty from 16th July - 20th July

Last week I had mentioned that interest rates and inflation are still quite high unless both start dropping, there is not going to be a runaway bull market. Also had mentioned that the entire rally from the closing low of 15965 has formed a bearish rising wedge pattern, from which the likely break out is downwards. But suggested that Nifty will try to attempt 5430 and it would provide good support at 5215 and 5159 which could be used as a buying entry point. What happened next! Nifty made a high of 5364 and then received support near 5215 placing a low for the week at 5228. Do you know what was the low of NIFTY INDEX? It was 5216.85.The markets closed with significant declines last week with all sectoral indices closing negative. The Sensex and Nifty were down 1.6% over the week. Quite a bit of disappointing week for NIFTY traders. Index traded within a narrow range of around 5220 and 5350 without giving much of trading opportunities.During the start of the week banking stocks reacted very aggressively on a hope that RBI would follow the path of central banks in China, Europe and the UK. In fact bank index contributed majorly to push NIFTY index towards 5350 mark on Tuesday. But Q1 results of INFY triggered stronger selling. However, TCS, came out with better results and prevented further panic.The weekly chart pattern of Sensex shows a ‘reversal week’ pattern that formed last week. Though the index received support from its 50 week EMA, it seems the support may not hold in the coming week. Such a ‘reversal week’ pattern usually terminates an intermediate rally the way it did when the previous rally got terminated in Feb ‘12.The index touched a higher bottom in Jun ‘12 than the one it touched in Dec ‘11, but has so far failed to cross above its Feb ‘12 top. A similar pattern was formed a year ago when Sensex touched a slightly higher bottom in Jun ‘11 than the one it touched in Feb ‘11. The subsequent rally failed to rise above the Apr ‘11 top, and the index dropped much lower. Is the pattern likely to repeat? The possibility can’t be ruled out. Only a move above the Feb ‘12 top of 18524 can push the bears on the back foot.Technical indicators are giving mixed signals. The MACD is above its signal line, and has just entered its positive zone. The ROC is positive and above its 10 week MA. The RSI is looking bearish it has slipped below its 50% level. The Slow Stochastic has entered its overbought zone. The 20 week EMA is trading below the 50 week EMA, which means the Sensex is technically in a bear market.A ‘rising wedge’ pattern had formed on the daily chart pattern of Nifty as well, from which a ‘gap down’ break out occurred last week. However, the ‘gap down’ break out is quite bearish.The good news for bulls is that the index has found support at its 20 day EMA. The still awaited ‘golden cross’ has yet not happened which can confirm a return to the BULL market.Technical indicators are still bullish, but showing signs of slowing upward momentum. The MACD is positive, but has crossed below its signal line. The ROC has dropped sharply below its 10 day MA into negative territory. The RSI has dropped from its overbought zone. The Slow Stochastic has fallen sharply from its overbought zone.Bears may use any pullback towards the ‘rising wedge’ as an opportunity to sell.

Conclusion: Chart patterns of Sensex and Nifty seem to be in danger of falling deeper into bear markets. Key Technical Indicators such as RSI and MFLDX are showing downward journey after touching the overbought zone. But multiple support lines around 5150 are seen on the chart. Also, the 50 day EMA is around same support zone. Therefore 5150 level is definitely a buy level for some quick gains in the coming week. Also do not forget that Nifty has formed ‘double bottom’ on the daily chart. So till 5215 is holding we can see Nifty again back above 5300 levels. If broken will fill the gap between 5159-5215. It is time to be cautious in speculation. High inflation and high interest rates are not favorable for bull market. Regular investments in blue chip companies should not be stopped. I would suggest buying Nifty around 5159 with a stop below 5090 for a target of 5400.