Nifty Analysis - A day after a major global equity sell off !! Beware of the short covering rally !!

This Monday morning came a major shock to many retail investors as markets tanked for more than 5%. India's benchmark index, Nifty made a gap down opening at 8057 recording a largest gap down since 2006. However according to many technical analysts the down fall was evident on last week charts yet no one would have imagined the intensity of global selling phenomenon which actually caused such a movement in the index.

The movement not only took a heavy toll on shallow pockets of novice traders, but even the seasoned investors, who have been passively investing started to ring up their brokers. I received many calls yesterday and all had one common interest. "How much is my folio effected due to the meltdown? Is it still an appropriate time to stay invested? Can we sell some equity now and buy later (suddenly some investors would turn to trading.) Such calls were  full of doubts about the India Shining Story. However there were certain smart investors who called me up and asked for my time to discuss their strategy of investing more. 

I firmly believe the India story is still intact and soon it will be the number one investment destination. There are strong reasons to it. I would rather not discuss the fundamentals of them in this write up as I feel a bit incompetent to give comments. I base my analysis on technical charts and price actions. The longer time frame charts do support the theory but then once again like I do in my all writings,  I would like to enlighten you that technical analysis are completely based on price action and investment psychology. Fundamentals may change any day, any time which may effect charts in a negative manner. Technically speaking, Nifty's monthly chart is following a channel pattern as indicated in the picture. The lower channel runs through an important support zones and indicates a support zone at 7300-7400 levels. This support line is positively sloped, hence the support zone would increase as we go along the time line. On an overall front, such type of wave structures suggest huge levels in coming future. The overall long term trend is definitely positive. You have to stay invested or rather looking to accumulate on every 10% dip.


Talking about the short term price action, the volatility on daily charts was very high as per suggested by the Bollinger Bands movement on daily Nifty chart. It had convincingly closed below the 20 day moving average with heavy volumes on Thursday, a week prior to the downfall. Later on Friday, it gaped down to create very strong resistance zone between 8324.9 and 8351. RSi too registered a reading below 40 which usually suggests a minor downtrend. RSI closed at 29 the very next opening on the D-Day. Moving forward I believe that the minor direction for Nifty has changed and it should take quite an effort in making Nifty work out at the much anticipated and expected levels of above 10,000. Today, we may see a sharp recovery which usually happens after such a mayhem day especially  when the longer horizon charts show a positive, strong and robust strength. 

Also the fundamentals have not been affected much by the global melt down. Our fundamentals still remain robust and strong. The only cause of worry would be the declining rupee value to dollar. This may adversely effect the Indian Interest Rate structure and wouldn't allow the Governor to  lower the interest rates which if not hampering the growth but still would not provide enough fuel required to boost markets to reach towards the much desired unrealistic valuations. There is always a positive aspect in any situation. The currency worry may effect the defensives positively. Export oriented sectors such as Pharama, IT, FMCG would all be prepared to reap money out of the currency fluctuations.

Overall as I keep saying, this is no time to go all in, but one must not get tired or bored from window shopping. Who knows you may get some good, interesting deal.

Keep Investing || Keep Trading

Nikhil Dhingra

Professional Development Chair

NDPMS Training Program

www.ndpms.in