Nifty : Where is Divergence ?

This week had been quite an eventful, even though the end result doesn't show much. The week started with three dull days then Thursday's rally took everyone by surprise and today it was an anti climax! Though its too early to write off the rally, the way Nifty reacted to 200 day moving average, would be very disappointing for the bulls. Also, Nifty broke through the downward sloping trend line on Thursday, but fell back below again. Saying that, we need to see some follow up action of price to confirm the end of the rally. Nifty is still above the Ichimoku cloud, with the buy signal still intact.

So in all, though backdrop is positive, things are murky, with the possibility to the end of this spectacular rally. When we need to check for reversals, its important that we look for divergences in the charts. Almost inevitably we will see some kind of divergence, whether its MACD, RSI, Money Flow or anything else.

I have discussed about the indicator which is calculated by plotting a 10 day moving average of difference between close and the weighted average of Nifty. This indicator has successfully predicted the major turns in Nifty since January. So we saw negative divergence between it and Nifty at January high, a positive divergence at February low, another negative at April high and another positive at June low. Keeping that in mind, I am expecting another negative divergence before this rally stalls. Apart from that only yesterday we made a new high on this indicator, which generally precedes Nifty highs.

To conclude, the fast rise that we saw in second half of last month, definitely begs for a correction. I am expecting some kind of lengthy shallow correction or a swift deep correction and then a rally back atleast to test the high made.