07 September 2009

Reliance: Confusion at its fag end

Here is a daily chart of Reliance, the largest contributor of Nifty and Sensex. We see that it has not touched its May 18th high even after over three and half months of trading. To add to it what we also see is that it has been making lower highs and higher lows for all these time, a clear indication that the street is confused on its fair price. The volumes have also gone significantly lower as there is not much of price movement to generate trading interests. A good tussle is going on at a price fulcrum of around 2000.

But this can not go on for ever and the equilateral triangle which is getting formed can break on either side. As per Elliot wave principles triangles are generally formed in wave 4 or in an ABC consolidation after a 5 wave structure. If the triangle we are seeing is in wave 4, then we should see a breakout which should take it above 2500, most probably 2600. If this is an ABC consolidation then things become complex, the break can be on either side and starting a new 5 wave structure. The targets cannot be calculated as calculations are based on the length of wave 1.

In any case, what we can say with confidence is that once the triangle is broken (in any direction) with confirmation of high volumes, we will see strong movement in that direction. As the width of the triangle is around 600 we can roughly calculate the breakout target as 2600 and breakdown target as 1400.

It would be interesting to see where the Nifty and Sensex go if Reliance moves to 1400 or more possibly 2600. In my opinion a 1400 Reliance means the markets have cracked and we are staring at 3500 Nifty, a 2600 Reliance would mean that we are making new highs and 5400 would be the likely valuation.


Faisal Humayun said...

Based on Fundamental Factors and Valuation I would assign a higher probability to a breakdown on the lower side.However, in a liquidity driven market, anything is possible.So maybe we can wait for the breakout trend to emerge before taking any positions...

Tarique Anwar said...

the effort of identifying a triangle is only worth when you wait for a convincing break of it and then trade in that direction. for sure no point in taking a call right now. we never know what can happen in future.

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