Missed last rally? Buy Now!

Missed last rally? Buy Now!

In the previous week, Nifty crashed as we were expecting it to. (See Approaching resistance, 31^st May). Was this a correction or reversal?

We get the answer from looking at weekly charts. Nifty has taken support at the rising trend line. The index managed to close above 50% retracement of 6357 to 2252 at 4317. In the process, it formed a hammer showing the buying interest that is coming at these levels. It it interesting to note that every price decline in this correction was at decreased volume and every price rise was on increased activity. This gives us an important clue that current fall was a correction and not a reversal.

Having said that, we must remember that almost every technical indicator is in overbought zone. Even in this fall, stochastic failed to return to oversold condition. So a much deeper correction maybe in hold in future. Currently, An oversold stochastic would have been almost an perfect buying opportunity as directional index shows that bulls are in complete control of markets.

However there is no certainty in this world and, despite overbought indications, I favor a bullish view on basis of volume analysis. Nifty should easily run through resistance at 4690- 4850 in this rally. I would expect it to test 5300-5500 zone in few sessions. It is strongly advisable to go long with a stop loss below 4100 for a target of 5300.

Only risk I can see is current analysis is possibility of a head and shoulder reversal pattern in daily charts. During the correction volumes have rejected lower prices. We would watch closely for any decrease in volumes during up move which will alert of a possible reversal. In case of decreased activity we will liquidate our long near left shoulder high of 4500 and wait for breach of this level to enter long again. If the prices start declining on increased activity from there, we will wait for break below 4100 to initiate shorts. However, as long as volumes confirm with prices we will continue with our long position as per previous para.

Interestingly, USD faces enormous resistance against rupee. It has hit previous gap and both trend line as well as Fibonacci resistances at these levels call for a weaker Dollar. (Tip for NRIs: if intend to send some dollar home, it might be the right time.) One interesting development we saw on Friday was an US based funds selling USD in large amounts. So, are we looking at more FII inflows ? Lets wait and watch.