Data Jan 5, 2013
Nifty broke out of its resistance zone this week and is ready to rally, but Sensex is held back at the oversupply level unable to go higher. The market needs two to tango and the Sensex has yet to step on to the dance floor.
Resistance zones are areas where the supply of stocks exceed demand usually leading to a fall in price. A break out of resistance as it happened with the Nifty is when buyers absorb the excess supply of stocks and take price above the area of oversupply. Usually a break out higher means prices can rally till the next level of oversupply. But like the cliche goes it's all about teamwork. Sensex and Nifty are the two major team players and unless both work in tandem a rally will not happen.
Let us look at the charts of Nifty and Sensex to get a clear picture. (click here for Sensex chart and here for the Nifty chart). We had marked the resistance lines on the Nifty for quite sometime. This week the Nifty finally broke out of its resistance zone and move slightly higher. Given the breakout, textbooks will tell you that the index should go to the next resistance level of around 6180 level. But for that to happen, the Sensex has to follow and break out.
Now let us look a the chart of the Sensex. Notice that price is stuck at the 19,800 level which is resistance and has not been able to break out this week. Unless the Sensex breaks out we'd be cautious about a market rally. In case the Sensex closes above the 19,800 level, one could go long. We'd prefer to go long on the Nifty as it is much stronger, with early breakout, than the Sensex. For the Sensex, a break out can take prices all the way up to the 20,650 level. Please note that these are not precise price points but the general area where the market can stop rallying, go sideways or even fall.
On the Sensex chart the green horizontal lines are the areas of support. Support areas are levels where the demand for stocks far exceed supply leading to a rally in the price. If price comes down ti those levels it would be a good place to buy. On the Nifty chart the first area of support is the bottom range of the most recent consolidation area, which is around 5800. The next level of support is shown by the green horizontal line.
The good news for bulls is that the market had a long period of consolidation before it rallied last week. This means that if the market falls, it will be difficult for bears to break below the consolidation areas, which generally provide good support. Now one has to wait for Sensex to break resistance to signal a further rally.
Importance of Sensex breakout
Traders should not take the importance of a Sensex breakout lightly. For example, on July 8 2011 both the Sensex and Nifty hit resistance and sold off sharply. The high for the Nifty that day was 5740 and for the Sensex it was 19,131. On October 4, 2012 the Nifty broke out of that resistance high to close at 5751 and next day it went as high as 5815. However the breakout could not be sustained as the Sensex closed on October 4, 2012 at 19,107 inside the resistance zone. The next day the Sensex went a little above resistance to 19,137 but could not close above it. As a result the both the Nifty and Sensex dropped for several days before breaking out higher only on November 30, 2012.
There was a request by one of Firspost's readers to analyse Kajaria Ceramics. Given the fact that the stock has been making new highs for sometime, before selling off recently, it can be difficult to analyse based on price action alone. I do however have projection tools that will give us something to base a forecast on, but they are not as good as price.
The most recent top and sell off was a result of Kajaria hitting the 100% Fibonacci extension at the Rs 260 level. I will not go into Fibonacci's here, but a lot of details can be found on the web. The three points used to anchor the extension are the low of Rs 83.25 made on November 18, 2011, the high of Rs 191 made on April 30, 2012 and the low of Rs 152.20 made on June 8, 2012.
Kajaria bounced of Rs 210 this week which was a 50% Fibonacci retracement and also an area of support. The support area is shown by two black horizontal lines on the chart. For the Fibonacci I have used the consolidation area of September 2012 as the low and the all time as the top. If the company made its low this week and is now headed higher the price targets are shown by the blue horizontal lines. On the other hand the green lines show the target if prices fall.
The negative for bulls is that the stock is now below its 50-week moving average, which could be bearish. However, historically Kajaria has consolidated around the 50 MA and then moved higher. When stocks tend to be putting in all time highs, it is important to look at the fundamentals, the price of other stocks in the sector and the stock price of the companies' customers.