Weekly Outlook of Nifty from Aug 21st - Aug 24th

Markets close the week firm with cautious optimism. The market closed the week in the positive on easing worries over inflation and sustained buying by the FIIs. The investors remained hopeful on economic reforms which lifted the sentiment enabling the market to close higher during the week ended on 17th August 2012. Global cues during the week remained a bit mixed with positive bias. However, the market appeared a bit nervous on last Friday after CAG’s reports on presumptive losses to the government on irregular sanctions of coal blocks, airport land and mining leases but despite these, the market managed to close the week with modest gains. There was no give up in FII buying.

An upward break out from a large symmetrical triangle, followed by a pullback to the top of the triangle and a bounce up is an indication that bulls are beginning to take control. All three EMAs have started rising and the index is trading above them. Technically, Sensex is back in a bull market.

Technical indicators are bullish, but about to correct from an overbought situation. The MACD is positive, and above its signal line. The ROC is also positive, but has crossed below its 10 day MA. The RSI is inside its overbought zone, but showing signs of turning down. The Slow stochastic is also inside its overbought zone, but moving sideways.

A bit of correction or consolidation appears likely. On the downside, the rising 20 day EMA and the top of the symmetrical triangle should provide support. On the up side, a cross above the Feb ‘12 top will put bulls firmly in control.

On the 1year chart pattern of the Nifty, an upward break out from eight months long consolidation within a large symmetrical triangle is clearly visible.

The 20 week EMA has moved up to touch the 50 week EMA; just as it had done earlier in Mar ‘12. But the Nifty was moving down in Mar ‘12 and the ‘golden cross’ did not take place. Looks like the bulls are determined to push the Nifty into a bull market this time.

Technical indicators are bullish. The MACD is rising above its signal line in positive territory. The ROC is positive and above its 10 week EMA, but showing signs of losing upward momentum. The RSI has risen to the edge of its overbought zone. The Slow stochastic has entered its overbought zone.

Few indicators are suggesting a likely correction or consolidation before any up move. On the down side, the top of the symmetrical triangle and the entangled 20 week and 50 week EMAs should provide support. A cross above the Feb ‘12 top of 5630 should restore the bull’s control.

Conclusion: Chart patterns of Sensex and Nifty are slowly returning to bull markets. Weakening economic fundamentals and policy inaction by the government do not indicate a runaway bull rally. But strong inflows of FII money seem to have changed market sentiments for the better. Stick to stocks with fundamentally strong, low debt companies. Certain indicators are almost in an overbought situation and profit booking can start on any day. The highest OI for Call options is at 5500 strike price suggests  lack of confidence about NIFTY index not crossing 5500 level in August 2012 F&O series. Keep in mind that the level 5430 is 76.4% Fibonacci Retracement level of the high of 5630 till the low 4770 made on 4th June 2012. History tells that NIFTY index obediently follows 76.4% retracement level as termination points for its current trend. So, better to start booking profits as Index approaches towards 5500 level and wait for next opportunity when market enters into correction mode. Aggressive traders can look for opportunity to short when Index heads near 5500.