28 December 2009

Nifty : Testing Mr. Elliot

To start with, the rounded reversal hypothesis described earlier fell flat face as Nifty took support at 4950 and bounced. The enormous short that got built during the fall, started covering once Nifty moved over the 5050 resistance. Very soon Nifty crossed 5100 and touched intraday high of over 5150 on 23rd Dec. The next day though Nifty moved sideways for better part of the day, second half saw more short covering which took Nifty to new 2009 highs of 5198. I wonder if bears can have faith on 5180, as Nifty closed marginally below it. 29th Dec should again be a good day to start with, but it remains to be seen if Nifty can cross 5180 and 5200 resistances. But for sure bulls will be incharge and any hopes of seeing a sell off is more than a wishful thought.

Last 3 trading days of the calendar year, hardly invites major interest and it promises to be a tepid end to an eventful year. The beginning of which was marked with Satyam catastrophe, Nifty was tied to 2500 which now seems to be a major bottom, we saw an upper circuit on Nifty and had record breaking volume days.




Now that the earlier scenarios have failed, lets see if something can be salvaged out of it, or we need to frame a new structure. In the chart above, 5182 touched in October (labelled as [5]) should still be valid. There are many characteristics in that wave that makes it so, namely Ending Diagonal pattern and more importantly a wave up after the momentum high wave. Anyway till this pattern is not totally violated lets stick to it. The 4539 low then should be treated as the end of wave A and the current upmove as the Wave B, which basically is the structure I have been sticking to. The only major change that would occur is that the flat ABC correction would be a more complex one.

The rise from 4539 (labelled as [A]) should be the counter-trend wave B and hence should be a 3 wave pattern. First of which ended at 5138 marked as [i], second ended at [ii] and the third is in progress. As this is the motive wave it should be a 5 wave structure, which we can assume to have started from 4807. In that case wave1 ends at 5183 and wave2 ends at 4944 and what we are left with are strong upside wave3, a modest corrective wave4 and another upmove of wave5 which should end with negative divergences.

Taking this into consideration I come to the following MINIMUM targets:
wave3 which is under progress should take Nifty to a minimum of 5320
the deepest of correction should bring it back to 5130
the last upside move can take it back to 5360

The reason I am taking the most modest of targets is that a flat ABC correction is valid only till wave B is at most 138% of wave A. This level comes to around 5430 and any move above this will completely invalidate the theory of this being flat ABC correction. Another resistance to be noted is 78% retracement of the fall from 6350 to 2250 which is around 5470.

So in my opinion Nifty looks bullish currently and a target of 5350 can be achieved in near term, which could be as early as mid January. Movement above that is surely going to tough, though we can see Nifty in 5400s with some good luck and good news. Any move into 5500s would surely make things ultra bullish and we should see Nifty flirting with all time highs of 6350. Corrections on the other hand after touching 5300s could take Nifty to as low as 4300s. This correction if the wave count is right should happen in 10 to 17 days as Wave C has direct relationship with Wave A which was nothing other than sharp!

The end of a long term uptrend is always marked by heavy retail volume, violent corrections and euphoric rallies, extreme values of PCR and a general bullishness about economy and stock markets. Some of these things are yet to be seen and hence all my correction hopes are getting thrashed. Lets see what we get in coming days, does things occur as Elliot Theory allow us to anticipate or this is yet another futile attempt to predict the market.

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