28 October 2009

Nifty : Relief Rally and Consolidation

After today's record selling, which made Nifty reach its target of 4860 (read previous post); many fears have crept in. This may not be the end of correction and we can see lower levels after some rally from oversold levels. Lets analyze why this correction came and how will we get out of it...

I have marked in green the rising wedge pattern, a very strong bearish indication along with negative divergence (also seen in green at MACD). Rising wedge patterns generally mark the end of a 5 wave structure. So strong corrections are expected once the wedge is broken. We saw it breaking on Oct. 22, first sign of things turning for the worse. The other aspect that supported a correction was the closing below 21Day EMA on the same day. (21Day EMA, is considered the make or break level by a bulk of swing traders). Other not so technical reason, being Telecom sector totally breaking down. We do see some weak sectors cracking earlier than the Index.

I have been pointing that the 5 wave structure that I am following from 3919 lows, suggests that we are in the 3rd wave from the 4353 lows of Aug. 19, which ideally is supposed to be the strongest wave. But looking at the MACD (blue arrow) of the 3rd wave, we don't see any new momentum high, that is momentum corresponding to 3rd wave is lower than 1st wave. This indicates that we will end up in the lower part of the band of the projected 3rd wave targets.

And that's exactly what happened, the minimum target of 5165 was overshot by mere 17 points. The other danger of this poor show by 3rd wave is that we can have a deep 4th wave, which otherwise would have been quite flat. So the 4th wave correction may take us to the lower end of the projected target (4865-4760).

Now let us focus on how the correction may look like. The alteration principle says that we may have a flat or triangle correction as the 2nd wave was a zigzag! There are higher chances of Nifty being in a 4800-5000 range for quite some time, with a rectangular or triangular pattern formation. But we should not totally rule out a swift zigzag correction as well.

Whatever be the correction pattern, we should look for two major factors, selling is slowing (positive divergence in MACD) and this correction not going below 4730 (end of 1st wave).

My gut feel is that we should see some relief rally from these oversold levels and then consolidate in a range. As I still feel there is another bout of buying left, I would presume that this range would finally frustrate the buyers and they will give in to their urge. We should see Nifty over 5250 when the 5th wave ends.


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