What’s holding up a Nifty rally? This indicator telling you a tale
This technical pullback halted near the 10,950 mark early December 2018.
This technical pullback halted near the 10,950 mark early December 2018. Since then, the index has faced resistance multiple times at this level and has also made unsuccessful attempts to move past this mark in last two months.
As Nifty once again attempts to go near this level and take out this immediate and important resistance area, one ponders what will it take for Nifty to see a sustainable breakout above this point.
Whenever a market attempts a breakout, it requires strength and all-round participation (read, larger participation) to make it sustainable. At this point, market breadth comes into picture.
Market breadth is an indicator used in technical analysis to gauge the direction of the broader market. Market breadth indicators analyse the number of companies advancing relative to those declining. Market rallies that see participation of a larger number of stocks tend to sustain longer.
A look at market breadth can also tell you the contribution of the broader market to the overall health of the market and indicate possible sustainability of any anticipated breakout.
The CNX500 Index, which represents the broader market, throws up some interesting insights here. The index, with 501 stocks as its constituents, represents over 95 per cent free float market-cap.
Shown above is the daily chart of CNX500 index. After marking a double top near the 10,000 mark and subsequent corrective moves, the index rebounded from just below the 8,400 mark and formed higher bottoms. But currently, it appears to be trapped in a narrow range in a symmetrical triangle formation.
A strong move would occur only after the index moves out of this range and after Nifty takes out the 200-DMA at 9,061.
Zoom out and a broader view of the weekly chart of CNX500 presents similar story.
In a similar formation, the index is seen marking a double-top near the 10,000 mark. It looks trapped in a pattern after a corrective decline. On the weekly time-frame chart, the index is seen facing resistance at the 50-week moving average, which currently stands at 9,205.
This moving average has almost become a proxy trend line for the index. The CNX500 index needs to take out the 9,205 (50-week MA) and 9,228 (200-day MA) levels. Once these levels are taken out, we will see wider participation of stocks in all future upward moves. This will lead to improved market breadth and make the rallies healthy and sustainable as and when they occur.
Until this happens, upward moves, if any, will have fractured breadths and this will make it difficult for such rallies to sustain. This is also what will keep the market highly stock-specific in the days ahead.
(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at firstname.lastname@example.org)