Stock Index Chart Patterns – S&P 500 and FTSE 100 – Feb 03, ‘12

S&P 500 Index Chart

The S&P 500 index chart continued its upward march, after a brief dip to its rising 20 day EMA. All three EMAs are rising and the index is trading above them – the sign of a bull market. The May ‘11 top of 1371 is the next big hurdle on the way, but looks like the bulls will leap over it with ease.

The technical indicators are looking overbought and showing negative divergences. The index can remain overbought for long periods, but the negative divergences in all four indicators hint at a correction. The slow stochastic has re-entered its overbought zone, but touched a lower top while the index moved higher. The MACD is positive and hanging on to its signal line without rising or falling. The RSI has also re-entered its overbought zone, but touched a lower top. The ROC is positive but drifting downwards.

Last week’s jobs report was hailed by the stock market as an indication that growth in the US economy is slowly getting back on track, but all may not be well. Initial jobless claims dropped to 367,000; non-farm payrolls increased by 243,000 – much higher than consensus estimates; the unemployment rate fell to 8.3% from 8.5%. That was the good news. The bad news is that labour force participation dropped to a 30 years low at 63.7%. AAII sentiment survey showed a 4.6% drop in bullish sentiment to 43.8% (still above its historical average of 39%), and bearish sentiment rose by 6.2% to 25.1% (below its historical average of 30%).

FTSE 100 Index Chart

The FTSE 100 chart has re-entered a bull market, after a short correction down to its rising 20 day EMA. The index closed at its highest level since Jul ‘11, but all four technical indicators are showing negative divergences by failing to reach higher tops. Another correction may be around the corner.

The technical indicators are looking bullish. The slow stochastic has climbed into its overbought zone after a sharp drop from a head-and-shoulders pattern. The MACD is positive and just above its signal line. The RSI bounced up from its 50% level, and rising towards its overbought zone. The ROC took support at its ‘0’ line and is moving up in positive territory.

UK’s manufacturing and services sectors enjoyed a decent start to 2012. The manufacturing PMI survey reading rose to 52.1 in Jan ‘12 from 49.7 in Dec ‘11, indicating a return to expansion. The services sector PMI rose to 56 in Jan ‘12 from 54 in Dec ‘11. A recession may be avoided if this rate of expansion persists, since the services sector forms 2/3rds of the UK economy. The bad news came from the Eurozone, where manufacturing PMI was at 48.8 in Jan ‘12 – up from 46.9 in Dec ‘11. A figure below 50 is a sign of contraction. Small and medium businesses in the UK are facing tough times, as bank lending is at its lowest level since 2009. Another dose of QE may be in the offing.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are back in bull markets – discounting the slow and tortuous growth in the US and UK economies. Bull rallies in both indices have been quite sharp. Likely corrections will restore the energy of the bulls. Use dips to add.

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 30 ‘11

The BSE Sensex and NSE Nifty 50 index chart patterns spent an entire year trading within downward-sloping channels, alternatively raising and dashing the hopes of small investors. A series of scams and government inaction on the policy reforms front spooked the FIIs, and they voted with their feet.

RBI’s attempts to stem the rising inflation rate through 13 interest rate hikes failed to tame inflation, but slowed down the growth engine of India Inc. to crawl speed. The government continued with its spending profligacy – subsidy payments and the NREGA scheme drained the coffers without increasing productivity – and aggravated inflation. Depreciation of the Rupee added to the woes.

All in all, a forgettable year. The good news is that neither of the two indices collapsed like they did three years ago. That doesn’t mean that sharp falls have been ruled out. 2012 is likely to be quite challenging – at least the first half of the year is unlikely to show any significant improvement in the economy or the stock indices.

BSE Sensex index chart

Last week, it was mentioned that any bounce from the lower edge of the downward channel would be a weak one. How was the conclusion drawn? The technical indicators on the daily and weekly charts had looked bearish, though positive divergences were visible on the daily chart. Note that the weekly bar of the Sensex moved above the support level of 15700 but stopped well short of the falling 20 week EMA. The index closed the week, month and year below the 15700 level – losing more than 25% for the year.

There is no respite for the bulls visible on the weekly Sensex chart. The index is trading below its falling 20 week and 50 week EMAs. All four technical indicators are bearish. The MACD has crossed below it signal line deep inside negative territory. The ROC is also negative and below its 10 week MA. The RSI is below the 50% level, but trying to rise. The slow stochastic has fallen inside the oversold zone. Expect a test and possible breach of the lower edge of the trading channel.

NSE Nifty 50 index chart

The weak bounce up from the lower edge of the downward channel took the Nifty above the support level of 4700 – only to face resistance from the falling 20 day EMA and sip down below 4700 at today’s close.

Note that during Apr ‘11 and Jul ‘11, the index made several unsuccessful attempts to break out above the downward channel. During that period, the lower edge of the channel wasn’t tested even once. The tables have turned in the past 5 months. Only one serious attempt was made to test the upper edge of the channel in Oct ‘11. But multiple attempts were made by the index to breach the lower edge of the channel.

It seems as if the weight is shifting downwards, and the next couple of attempts to breach the lower edge of the channel may lead to a sharp fall - which the bulls have been able to prevent so far. The technical indicators have corrected oversold conditions, but are looking bearish.

The MACD is about to cross below its signal line in negative territory. The ROC is above its 10 day MA and trying to enter the positive zone. Both the RSI and slow stochastic are below their 50% levels. For the past two months, the Nifty is also facing resistance from a small blue down trend line drawn within the downward channel.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns are falling gradually within downward-sloping channels. The balance of power is shifting to the bears, and sharp falls below the channels may happen sooner than later. Remain patient, but stay prepared. Some investable funds may be locked away in long-term bonds offering tax-free interest.

Stock Index Chart Patterns – Jakarta Composite, Korea KOSPI, Taiwan TSEC – Dec 23 ‘11

In my previous analysis of the chart patterns of the Jakarta Composite, Korea KOSPI and Taiwan TSEC index charts, I had made certain observations about the likely moves of the three indices. As it so happened, all three of my ‘guesstimates’ turned out to be correct.

I may pat myself on the back about my ‘predictive’ capabilities – but the fact is that chart patterns can’t really be predicted in advance. At best, one can make educated guesses about likely occurrences based on the way similar chart patterns played out earlier. Some times, patterns turn out exactly as you expect them to; at other times they make a complete fool of you.

Many put the blame on technical analysis as a decision making tool for investing. The fault usually lies with the analyst who boldly ‘predicts’ outcomes which don’t occur. It is necessary to look at several different technical indicators to arrive at a logical conclusion. Still, charts can ‘behave’ in radically different ways because ultimately an index chart pattern represents the collective greed and fear of market participants.

Jakarta Composite Index Chart

My observation about the Jakarta Composite index chart two weeks ago was: “Expect some more sideways consolidation.” The index consolidated between 3700 and 3800 for two weeks, dropping below the 3700 level and the 200 day EMA once on an intra-day basis. The 3800 level was crossed four times on intra-day basis, including the last three days of the current week. But the index failed to close above the 3800 level even once – indicating that the bears are defending it strongly.

Technically, the index is in a bull market and showing signs of wanting to move higher. All three EMAs have started moving up. Today’s intraday high of 3822 is the highest level the index has touched in more than a month. Crossing above the Oct ‘11 top of 3875 will form a bullish pattern of higher tops and higher bottoms.

The technical indicators are suggesting mildly bullish conditions. The slow stochastic is about to enter its overbought zone. The MACD is above its signal line and barely positive. The ROC has just climbed into positive territory. The RSI is above the 50% level, but falling towards it. An interesting tussle is expected between the bulls and bears over the next couple of weeks, with the bulls having a slight edge.

Korea KOSPI Index Chart

The Korea KOSPI index chart was expected to fall below its 20 day and 50 day EMAs. It fell a little further to touch an intra-day low of 1750 on Mon. Dec 19 ‘11 – slightly lower than the Nov ‘11 low of 1767, forming a bearish lower tops and lower bottoms pattern. The index is trading below its falling 200 day EMA and is in a bear market.

The bulls are not quite out of the game yet. Note the positive divergences in the slow stochastic and the RSI, which touched higher bottoms as the index dropped lower. That could lead to another attempt by the index to cross above its 200 day EMA – and probably another failure.

Despite the positive divergences, the technical indicators are looking weak. The slow stochastic is below the 50% level. The MACD is negative and below its signal line. The ROC is also negative, but trying to climb up. The RSI is below its 50% level.

Taiwan TSEC Index Chart

The Taiwan TSEC index was expected to test and fall below its Nov ‘11 low, and it showed no hesitation in doing so as it dropped to a low of 6609 on Mon. Nov 19 ‘11. Note that all four technical indicators touched higher bottoms as the index dropped lower. The combined positive divergences led to a sharp upward bounce and the index had a weekly close above the 7000 level.

In spite of the sharp bounce, the technical indicators remain bearish. That means the falling 50 day EMA may stall the upward move. The slow stochastic and the RSI are below their 50% levels, but rising. The ROC is about to cross into positive territory. The MACD is above the signal line, but negative.

The index is trading well below its 200 day EMA, and is in a bear market.

Bottomline? The Jakarta Composite index is technically in a bull market, but still struggling to keep the bears away. The Korea KOSPI and the Taiwan TSEC indices dropped below their Nov ‘11 lows and are trying to rally. Investors can very selectively look for value in beaten down stocks. It may be more prudent to wait till the indices cross above their respective Oct ‘11 tops.

Nifty 50 chart pattern: a midweek update

The following comments were made in last Sunday’s post:

“The NSE Nifty 50 daily chart pattern is clearly showing positive divergences from all four technical indicators, which made higher bottoms while the index fell lower. That should lead to an upward bounce. Perhaps a weak bounce because the indicators are looking bearish.”

“TRIN has spiked up sharply to 1.4, which indicates oversold conditions and a very likely upward bounce. A TRIN level of 1.2 and higher indicates oversold conditions, which is usually followed by an up move.”

Instead of bouncing up, the Nifty continued its fall during the first two days of the week, closing at 4544 on Tue. Dec 20 ‘11 - below the downward channel. The TRIN rose to 1.5 – its highest level in the past year. Positive divergences disappeared from the MACD and slow stochastic indicators, but both the ROC and RSI continued to show positive divergences (marked with blue arrows in the Nifty 50 chart below).

The strong 150 points bounce in today’s trading has not changed the technical picture greatly. The index has moved back within its trading channel and prevented a steep fall for now, but its upward bounce stalled near the 4700 level that had earlier provided support during Aug to Oct ‘11.

Today’s up-day volumes were about the same as yesterday’s down-day volumes, and lower than Monday’s down-day volumes. That probably means more short covering than buying. All four technical indicators are bearish – though showing some signs of turning around. The MACD and ROC are negative. The RSI is below its 50% level. The slow stochastic is in its oversold zone.

As mentioned in last Sunday’s post, don’t try to chase this bounce because it may not go very far. Even if the Nifty crosses the 4700 barrier, resistance can be expected from falling 20 day and 50 day EMAs.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Dec 16, ‘11

S&P 500 Index Chart

The small rounding-top bearish pattern observed on the S&P 500 index chart pattern last week led to a small correction-cum-consolidation. The outcome was along expected lines because of the contradictory technical signals. The technical indicators were looking bullish but were also showing negative divergences.

The technical picture has turned weaker. The index closed below all three EMAs on Fri Dec 16 ‘11 – a bearish weekly close due to the high volumes. The 20 day EMA failed to cross above the 200 day EMA and has turned down. A breach of the Nov ‘11 low of 1159 would form a bearish pattern of lower tops and lower bottoms. As long as the Nov ‘11 low holds, the bears won’t regain control.

The technical indicators are showing bearish signs. The slow stochastic has dropped from its overbought zone, but is above the 50% level. The MACD is barely positive and touching its signal line. The RSI is looking bullish as it rises above its 50% level. But the ROC has dipped into negative territory. The contrary signals means some more consolidation in the offing.

The US economy is starting to get back into the growth path, but too slowly. Initial unemployment claims decreased by 19000 to 366,000 – comfortably below the 400,000 mark. New loans and leases to small businesses have been increasing for the past 15 months – considered as a leading indicator of economic growth. But industrial production in Nov.’11 was down 0.2% on a month to month basis, following a 0.7% increase in Oct. ‘11.

FTSE 100 Index Chart

The small bearish rounding-top pattern on the FTSE 100 index chart had pushed the index below the 200 day EMA last week. Negative divergences in otherwise bullish technical indicators encouraged the bears to sell. The index closed the week below all three EMAs.

The technical indicators have turned weaker. The slow stochastic is falling towards its 50% level. The MACD is barely positive and clinging to its signal line. The RSI is above its 50% level, but its up move has stalled. The ROC is looking bearish by falling sharply into negative territory. Watch the Nov ‘11 low of 5075 closely. If the FTSE falls below it, the bears will regain control. Till then, expect some more consolidation.

The global economic outlook for 2012 seems bleak. Europe may already be in recession. The UK may be slipping into a double-dip recession. Order books of UK factories are shrinking due to poor domestic demand and the slow down in exports to Europe. Top retailers are facing losses.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are struggling to keep the bears at bay. So far, the Nov ‘11 lows have held. A fall below could lead to sharp declines. This isn’t a good time to be adventurous. Hold on to your cash and await a clear trend.

BSE Sensex and NSE Nifty 50 index chart patterns – Dec 16 ‘11

In last week’s analysis of the BSE Sensex and NSE Nifty index chart patterns, I had mentioned the likelihood of both indices falling below their support levels (marked by blue dotted lines). So, the break and close below the support levels on Fri. Dec 16 ‘11 should not have come as a surprise to this blog’s followers. The good news is that neither index fell below its downward channel. We will expect both indices to continue trading within their downward channels – unless something drastic happens in the global or local economies.

BSE Sensex index chart

The sharp fall last Friday dropped the weekly bar of the Sensex to a closing level below 15500 – its lowest weekly close in more than 2 years. While that may sound ominous, it isn’t the end of the world – yet. Note that the Sensex fall stopped just short of the lower edge of the downward-sloping channel.

Will the Sensex bounce up – like it did on the past few occasions when it dropped to the lower edge of the channel? Three of the technical indicators are suggesting: ‘No’. The MACD has slipped below its signal line in negative territory. The RSI is falling below its 50% level. The slow stochastic is moving sideways below its 50% level, but has started sliding.

Only the ROC is showing positive divergence by touching a higher bottom while the index dropped lower. However, the ROC is negative and below its 10 week MA. So, any bounce up may be a weak one and induce more selling. There is a possibility of some FII buying in the next week – due to year-end considerations.

NSE Nifty 50 index chart

The NSE Nifty 50 daily chart pattern is clearly showing positive divergences from all four technical indicators, which made higher bottoms while the index fell lower. That should lead to an upward bounce. Perhaps a weak bounce because the indicators are looking bearish. The MACD is negative and below its signal line. The ROC is also negative – but has dropped too far below its 10 day MA. The RSI failed to cross above its 50% level. The slow stochastic has just entered its oversold zone.

A look at the NSE TRIN indicator gives a slightly different picture:

Note that the TRIN has spiked up sharply to 1.4, which indicates oversold conditions and a very likely upward bounce. A TRIN level of 1.2 and higher indicates oversold conditions, which is usually followed by an up move. (Please don’t go crazy about chasing the bounce!)

The pause in interest rate hike by the RBI should have encouraged the market – but didn’t. Ignoring ‘good news’ is the sign of a bear market. Inflation still remains high, even though food inflation has come down. The de-growth in IIP is a huge concern.

Many corporate honchos are fed-up with policy inaction and flip-flops by the UPA government and want to shift their businesses overseas. Some have started spending a lot of time overseas to manage their global businesses. The BJP-led opposition along with the Leftists are trying to corner the government on the issue of corruption, but stalling the passage of the Lokpal Bill which is meant to curtail corruption!

In short, the economic and political climate is just not conducive enough for the stock market to stop its steady slide.

Bottomline? The BSE Sensex and the Nifty 50 index chart patterns continue their slide within downward-sloping channels. Bravehearts can trade the range. Sensible investors may be better off parking their money in bank fixed deposits or gilt funds. Those who are accumulating good stocks trading at reasonable values should keep a two-three years time frame in mind.

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Dec 9, ‘11

S&P 500 Index Chart

In last week’s technical analysis of the S&P 500 chart pattern, I had commented: “Expect a bit of consolidation before the index makes up its mind about the next move.” That was exactly what the index did during the past week - closing above the 1250 level on four out of the five trading sessions – but making very little upward progress.

The good news for the bulls is that index is trading above all three EMAs, with the 20 day EMA about to cross above the 200 day EMA. The bad news is that the index has made a small rounding-top pattern, which may be signalling an end to the brief rally. Also, the slow stochastic and the RSI are showing negative divergences by touching lower bottoms in Nov ‘11 while the S&P 500 touched a higher bottom.

The technical indicators are looking bullish. The slow stochastic has re-entered its overbought zone. The MACD is positive, and above its rising signal line. The RSI is above its 50% level, but appears reluctant to move higher. No such hesitation with the ROC, which is rising in positive territory. Some more consolidation or even a minor correction can be expected this week.

The US economic indicators are improving ever so slowly. Initial jobless claims at 381,000 were at the lowest level since Feb ‘11. The Reuters/Univ of Michigan Consumer sentiment index at 67.7 was at a 6 month high, but remains below its long-term average. Even the ECRI’s Weekly Leading index rose, though the institute is standing by its earlier prediction of a recession.

FTSE 100 Index Chart

The technical indicators of the FTSE 100 chart were looking bullish last week, which pointed to a continuation of the rally. But after a brief foray above the 200 day EMA, the index formed a small rounding-top pattern and slipped below long-term moving average by the end of the week.

The slow stochastic is at the edge of its overbought zone. The MACD is above its signal line in positive territory. The RSI is above its 50% level. The ROC is rising in the positive zone. These are all bullish signs. But the negative divergences in the slow stochastic and the RSI may put an end to bullish hopes. Note that both touched lower bottoms in Nov ‘11 while the index touched a higher bottom.

UK’s opting out of the European Union agreement to protect its financial interests may have far-reaching negative consequences. There is a good possibility that its manufacturing exports to the Eurozone will suffer. Already, there is a slow down with manufacturing output declining by 0.7%. The good news is that the Eurozone isn’t going to break-up and the euro may not disintegrate.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are showing some signs of weakness, but as long as the Nov ‘11 lows hold there should be no cause of worry. The Oct ‘11 highs are barriers on the upside that need to be crossed for bulls to regain control. Expect some more consolidation or correction. Wait for a clear trend to emerge.

Stock Chart Pattern: Akzo Nobel (ICI) India – An Update

During my previous technical update of the stock chart pattern of Akzo Nobel (ICI) India more than a year back, the stock had corrected down to 845 after touching an all-time high of 970 in Sep ‘10. The technical indicators were looking oversold while the OBV indicated accumulation. That led me to surmise that the next up move could touch the 4-digit mark. I had also suggested that any drop below 845 could be used to enter with a stop-loss at 750.

It is time to have a look at the two years bar chart pattern of Akzo Nobel and see what kind of returns the stock has provided:

The stock did eventually rise to a new all-time high of 1045 in Jul ‘11, but not before inflicting pain on investors. Such are the hazards of relying on technical analysis – chart patterns don’t always play out as per expectations.

Note that the 750 level provided good support during Nov ‘10. It was briefly penetrated in Dec ‘10, before the stock price bounced up nicely. Through most of Jan ‘11, the stock managed to stay above the 750 level. But once the support was broken, the stock fell quickly to a low of 680 – a 30% correction from the top of 970 that briefly pushed the stock into a bear phase. The 680 level coincided with the top of Jan ‘10 – an example of how a previous top can often act as a support.

The bear domination didn’t last long. Within 5 weeks of touching the low of 680 in Feb ‘11, the stock broke out above the 750 level on a sharp volume spike, and proceeded to rally to an all-time high over the next 4 months.

Couple of interesting points to note here. When the stock price dropped to its 52 week low of 680 in Feb ‘11, all four technical indicators touched higher bottoms (marked by short blue arrows). The combined positive divergences gave advance notice that the bear phase won’t last long. Again, during the four months long rally to the all-time high of 1045 in Jul ‘11, all four technical indicators reached lower tops (marked by long blue arrows). The combined negative divergences warned that the bull rally was over.

Technical analysts often claim that the fundamentals are ‘in the price’. In this case, they would have been correct. Q2 ‘12 results announced last month showed good top line growth but a sharp drop in profits at the gross and net levels, thanks to the rise in raw material costs. The stock price dropped vertically below the 200 day EMA post the results announcement to the support of the blue up-trend line, but the stock had already corrected more than 10% from its peak prior to the results.

The 200 day EMA is providing resistance to the efforts of the bulls to take the stock price back into a bull market. The falling 50 day EMA is still above the long-term moving average, but a cross below the 200 day EMA (‘death cross’) may push the stock price down to the support zone between 680 – 750.

The technical indicators are giving mixed signals. The MACD is above the signal line, but inside negative territory. The ROC is falling sharply towards its negative zone. Both the RSI and the slow stochastic are above their 50% levels. Bounce ups on good volumes from the up-trend line, the 750 level or the 680 level may be good entry points.

Bottomline? The stock chart pattern of Akzo India (ICI) Ltd is an example of why small investors should look at fundamentally strong companies with solid balance sheets and trustworthy managements. While the Akzo stock has provided zero returns (not counting dividend of Rs 18 per share) in the past 12 months, it has given nearly 50% returns over the past two years. Compare that with the Sensex, which has provided negative returns in the past 12 months and zero returns in the past two years.

Stock Chart Pattern - State Bank of India (An update)

The stock chart pattern of State Bank of India was last analysed more than two years back. A lot of water has flown down the Ganges since then, and the fortunes of India’s biggest public sector bank has almost waxed and waned with the river’s tides.

A change of guard at the top brought with it sweeping changes in some of the lending policies. The very popular but financially disastrous teaser home loan rates were scrapped. Cleaning up the balance sheet meant a one-time hit on the bottom line. The bad news came at a time when the overall market had begun correcting after a 20 months long bull run.

The effect on the stock’s price was dramatic, as the bears went on a vicious rampage. The stock not only dropped into a bear market, but lost more than 50% from its Nov ‘10 peak. Let us have a look at the 2 years bar chart pattern of State Bank of India and analyse whether it is a good idea to enter this beaten down stock:

The stock touched a new high of 2500 in Oct ‘09 – a full 100 points higher than its bull market top of 2396 in Jan ‘08. A corrective move followed; the stock’s price dropped more than 25% to a low of 1863 in Feb ‘10, and looked ready to enter a bear market. But the 200 day EMA provided strong support throughout Feb ‘10, and positive divergences in the technical indicators led to a strong bull rally.

The stock’s price struggled to move above its previous top of 2500 through most of Jul ‘10. A break out on a volume spurt in Aug ‘10 propelled the stock to an all-time high of 3515 on Nov 8 ‘10. Unfortunately, it turned out to be a ‘reversal day’ (higher high, lower close) that signalled the end of the bull rally. That wasn’t the only warning signal.

Note that all four technical indicators reached lower tops (marked by blue arrows) as the SBI stock touched its all-time high. The combined negative divergences also pointed to a correction – if not a trend reversal. Interestingly, the MACD formed a head-and-shoulders reversal pattern with a downward-sloping neckline during Aug through Nov ‘10.

The confluence of bearish signals had a disastrous effect on the stock’s price, which crashed to a low of 1709 on Oct 5 ‘11 – a 51% correction from its Nov ‘10 peak. Q2 results appeared good at first glance, but not so great on a more detailed look. The stock formed a ‘reversal day’ pattern backed by very heavy volumes today, and may drop down to test and break its Oct ‘11 low.

The technical indicators are turning bearish. The stock has formed a bearish pattern of lower tops and lower bottoms over the past year, and is trading below all three EMAs and the blue down-trend line. The downgrade of the banking sector by Moody’s couldn’t have come at a worse time.

Bottomline? The stock chart pattern of State Bank of India is deep inside a bear market, with no signs of bottoming out yet. If the Sensex has to revive, SBI has to revive as well – but it doesn’t look like a possibility any time soon. If you like the banking sector, look at HDFC Bank or even a Yes Bank. The PSU banks are increasingly looking less attractive.

Two market breadth indicators (an update)

Six weeks have elapsed since my previous post on two Nifty breadth indicators - the A-D line and the TRIN. During this period, the Nifty consolidated in a rectangular range between 4700 and 5200, just below the large descending triangle pattern it had formed since the top of Nov '10. Here is a quick update on the two market breadth indicators.

Nifty A-D Line


The A-D line has tracked the Nifty's fall since the Nov '10 peak with some notable exceptions. During Feb '11 to Apr '11, the Nifty made a series of three higher bottoms, while the A-D line reached three lower bottoms. In the rally that followed, the Nifty reached a higher top in Apr '11 than the top in Feb '11. But the A-D line's Apr '11 top was at the same level as its Feb '11 top. These negative divergences were a warning that the next down leg in the Nifty was imminent.

Again, the Jun '11 bottom on the Nifty was at the same level as the second bottom in Feb '11. But the A-D line touched a much lower bottom in Jun '11 - a negative divergence that suggested that the subsequent rally may be short-lived. What the A-D line does not indicate is exactly when the negative (or positive) divergences will affect Nifty's movements.

Last week, the Nifty made a higher bottom within the trading range, but the A-D line touched a slightly lower bottom. The negative divergence is a likely precursor to more selling in the coming week.

Nifty TRIN


 There are a couple of interesting points to note on the Nifty TRIN chart. In end-Aug '11, when the Nifty fell to its 52 week low after breaking down below the descending triangle pattern, the TRIN spiked to 1.25. A value of 1.2 or higher means the market is oversold and due for a rally.

The rally followed almost immediately, but the Nifty quickly reached an overbought condition - as indicated by the sharp drop of the TRIN below 0.75. A correction in the Nifty followed, but the TRIN is not indicating an oversold condition as yet. We can, therefore, conclude that the correction in the Nifty isn't over yet.

Both the A-D line and the TRIN are pointing to a further correction in the Nifty. Any upward bounces are likely to attract selling. As with all technical indicators, these two are not fool-proof and should be used in conjunction with other indicators like EMA crossovers, slow stochastic, ROC, RSI.

(Charts from: www.icharts.in)