Thursday, May 01, 2008

Prudent to be Cautious at Current Levels

The markets opened with a small positive bias near the highs of the day but could not sustain those highs and it wasn’t very long before they started slipping down. They made some attempt to recover in the mid-afternoon but failed and closed at the lows of the day.

Above is the 30 minutes chart of the Nifty. As seen from the chart, it currently stands at support at the blue trendline, which has been providing support to the prices for the last fortnight. There is nothing bearish about the prices as of now. What is worrying is the bottom half of the chart. That is where the bearishness is visible. While the price has gone on to make a higher low, the Relative Strength Index (RSI) has actually gone below its previous low, which is giving a bearish signal. One must be careful at these levels as the markets can come down because of this bearish divergence between the price and the RSI.

There are two things that can happen now. Either the Nifty can decide to break the trendline by going below 5150 and come down to test its lower supports (marked by the dashed brown lines at 5080, 5020, 4995 and 4950). Or, alternatively, it may move between 5150 and 5180 for a better part of the day tomorrow so that the RSI cools down some more and comes between 40 and 50 and then go on to resume the uptrend. What it will finally decide to do, we’ll only come to know by seeing the price movement tomorrow morning. If the market does decide to go up and crosses its most recent high at 5230, then we are looking at a resistance near 5300.

Divis Labs seems to have made a bullish head and shoulders pattern on its daily chart. The only hitch seems to be that the right shoulder is not very well formed. But what is heartening is, is the fact that the breakout was confirmed with a big spurt in volumes. This seems to give us a small confirmation that the breakout (and the pattern) may not be false. Consider buying at current levels with a stop loss of 1360 for a target of between 1750 and 1800.

A similar pattern seems to have been made on this daily chart of Praj Industries. Likewise, it seems to be a good buy at current levels with a stop loss of 165 for a target of near 270. Just like the chart of Divis Labs, this chart too has confirmed the completion of the head and shoulders pattern with huge volumes.

Happy Investing!!!


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