Weekly Outlook of Nifty from May 20th - May 24th

During the week Nifty rallied exactly as predicted. Last week it was explained that ‘Chart patterns of Sensex and Nifty are on the verge of touching new 52 week highs, and may move up to touch life-time highs. The next resistance is at 6180 which seems tough to cross. Derivatives data confirms 6200 as a strong resistance for May 2013 F&O series. The highest OI for Call option is at 6200 strike price Calls. Therefore the possibility of crossing 6200 level in this series is very low. The MFLDX continues to be bullish and FII’s net positions in derivatives segment supports continuation of the current rally for some more time’.  What happened next? Nifty rallied to 6200 achieving the target of 6181 and it kissed 6199.95 for the week.

It is the 5th straight week of higher closes despite continuous selling by DIIs. Several chart patterns are visible in the weekly chart of Sensex.

First, the ‘diamond reversal’ that formed during Oct – Dec ‘10. It ended the previous bull phase that started from Mar ‘09. The horizontal line drawn from the right apex of the ‘diamond’ has acted as a resistance level for more than 2 years.

The bear phase that started after the break down below the ‘diamond’ and ended with an intra-week low of 15136 in Dec ‘11 actually turned out to be the first half of a bullish consolidation pattern known as a ‘cup and handle’.

The ‘handle’ formation appears to have completed, and the rally during the last 5 weeks is about to convincingly breach the resistance level of 20200. Upward target of the ‘cup and handle’ pattern is 25000. The next leg of the bull market that started in Mar ‘09 is ready to unfold.

Weekly technical indicators have turned bullish, but display negative divergences. Does that indicate a possible reversal of trend, or a more probable correction/consolidation near a previous top.

Nifty

The daily technical indicators are bullish and looking overbought. That doesn’t mean Nifty can’t move up higher. Rising volumes last week; after the break out above 5970 and a pullback - is a bullish sign.

However, the need for caution at a new high can’t be disregarded. So stay invested with a trailing stop-loss, or add stocks where you see compelling value.

Conclusion: Technically speaking, level 6181 is a “make or break” level as during January 2011 Index had made a high of 6181 and thereafter there was a fall of almost 1000 points without any halt. Considering the past history one can obviously expect huge profit booking at this point of 6181 level.

The Call option buildup at 6200 is still a resistance as no panic among Option Writers was witnessed to exit from this level. Therefore the best strategy is to wait and watch the Open Interest (OI) at 6200 strike price call option. The PCR (Put/Call Ratio) is at 1.43 which means it has still not reached overbought zone though Index has already reached near 6200 level. The MFLDX continues to be bullish and still no signs of divergence seen. Hence overall view still remains bullish. Therefore to conclude, if NIFTY Index is able to cross 6200 level convincingly in the coming week then NIFTY traders can once again take long positions with a target of around 6339. Chart patterns of Sensex and Nifty are about to board on new bull phases after touching 2 year highs. Don’t expect a one-way up move. Use corrections/consolidations as adding opportunities. Choose the best quality stocks, and maintain a stop-loss.