28 November 2009

Nifty : Crystal Gazing

I am being a bit wild here in today's post just as the Stock Markets around the world. Typically the day after expiry which always is a Friday tends to be a slow trade day, where big players just chill and enjoy the spoils of the previous series, watching poor retail investors and traders struggle among themselves trying to move Nifty by 10-20 points! But I am sure the overnight news from the Middle East mostly known for its exotic hotels and duty free shopping would have spooked them, ensuring the beer had to wait a little longer.

Nifty opened 100 points down straightaway and slided almost another 100 points, with 300 points shove off in a matter of hours it was obviously damn oversold. Traders not realizing it would have been caught in their "shorts". So what we get is another 150 points though in the other direction. Almost a week's swing in a single day! What I personally have learnt from today's price action is that we cannot take anything for granted, I could have easily sold 4900 Nifty Calls when it was at 4800 expecting to make a decent gain in coming days and end the day almost at 200% loss, a trade going horribly wrong!

Anyway coming to Charts and Technical Analysis, today's candle has a long tail below showing buying (short covering) taking place till the last moment we can expect this bounce to continue maybe till around 5000, but should be facing significant resistance at 4930-4950 levels which acted as good support earlier. I consider 21day EMA as a very good indicator so would be betting on not crossing it on closing basis.

Coming to the chart that I have shown, though its very early days for it but the pattern is getting formed almost perfectly. The Head and Shoulder pattern is one of the strongest and most reliable indicator of a trend reversal. Instead of going into the details of it, I would like to point that it confirms the end of a 5 wave structure and suggests a meaningful correction. As per the chart we can see Left Shoulder, Head and Right Shoulder, now if Nifty breaks the neckline and that too with good volumes it surely means the end of the "bull run". I feel in coming days the level of 4700 on nifty should be watched very carefully, this is where the neckline support would be in around a week and a half time.

I have rechecked my H&S notes to see if all the indicators fall in place, and to my surprise they do! Be it left shoulder within the up trendline, volumes increasing in left shoulder and then decreasing in right shoulder. But surely we can get mistaken so a confirmation of neckline break is of utmost importance for this hypothesis to be valid.

So what if this is a H&S pattern. The break of neckline around 4700 region with volumes would give us a minimum downside target of 4700-700=4000! Though we can expect a bounce from oversold levels after breaking the neckline which should be resisted at the neckline. I am talking about very distant future but that's only my concern for this post. So if things fall in place, I am sure december and early january is going to be a period to watch out. Historically not much happens in this holiday period across the globe, and for the above reversal to happen I feel we would need good participation. Lets see how this unfolds, but chances are that the fund managers are not going to have a relaxed vacation.We have 20 days to trade in december and the way situation take dramatic turns overnight, its not a distant future what I am talking about. Lets see if Dubai Debt issue proves to be a trigger for sell off or a start of a new crisis or who knows another false alarm giving opportunity to buy.


Faisal Humayun said...

In my opinion,we have a good chance of reaching the 4000 type of levels in the next 6 months...From a fundamental perspective, this downside will be triggered mainly by the decline in optimism about GDP growth as well as corporate earnings growth...

However, if we do get to 4k type of levels in the Nifty then it should be a good long term buying opportunity

gunamj said...

The Right word as per me is false alarm for buying :) If this is another Crisis then already all Real estate sector with zero percent interest and which will eventually going to increase in mean time will make the participants uncomfortable... But the supreme word liquidity might do whatever it can to find the scapegoat (Retail Investors) 4000 is itself an uncomfortable level if this crisis gets a warm welcome from Big Bears

Tarique Anwar said...

Most of the chart patterns are realized and appreciated only in hindsight. We should try to be aware of all types of development, and many patterns do fail because there are other forces at play. For example in the above case we may come across strong weekly and long term daily moving averages before we hit 4000. So keeping stops and playing one move at a time is advisable. On the other hand I think we should also be flexible to know that valuation is given by the market, so a 3000 Nifty is still not cheap enough and 5000 still not expensive!

gunamj said...

Yes, i do agree with your view...

"valuation is given by the market, so a 3000 Nifty is still not cheap enough and 5000 still not expensive!"

@ 2500 levels evryone started talking about
Nifty rightly valued @ 1800 levels but now they all say 5500 is possible in short term :)

Liquid proves supreme...

But Ji, Fundamentals always gets it's importance always later than sooner :)


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