Weekly Watch - May 22 2011

The week started on a negative note as Nifty lost 0.8% on Monday followed by a steeper 1.1% cut on Tuesday. However, a positive thing to happen on Tuesday was that while Nifty closed at 5439, lower than the close of 5460 made on 5th May, the relative strength index (RSI), made a higher bottom, resulting in "Positive Divergence" as shown in the daily chart below. This indicated that the fall is happening with lesser strength and also gave a hope that a pull-back rally might be on cards. On Wednesday, the benchmark fell a third of a percent to make a bottom of 5401, followed by a marginally green Thursday. The last day of the week, finally brought that much awaited pullback, which saw Nifty surging 1.6% intraday to touch a high of 5517 and finally settling at 5486, down 1.05% week-on-week.

While a pull-back rally was a logical expectation after a positive divergence, the resumption of a higher-top higher-bottom formation is the key requirement to turn the view decisively bullish, which is yet to happen. The pullback can extend itself to around 5600 if Friday's high 5517 is crossed, where the 200 day exponential moving average (5615) and the top made on 13th May (5605) present a tough resistance. Beyond 5615, Nifty can rally till 5736, which is the 61.8% retracement level of the 5944-5401 fall as shown in the weekly chart below. On the way down, the breach of this week's low, 5401, can take the benchmark to around 5350, where the trend line adjoining 4786 and 5177, the bottoms made in May 2010 and February 2011 respectively, presents a support. Below 5350, a retesting of 5177 is quite possible.