Trading Pattern in Nifty

After a relentless rise in a non congestion zone Nifty finally faced resistance around the 6200 level. Looking back we can see that highest weekly closing has been 6274. This week Nifty crossed that level for moments and then slumped back rapidly below 6100. And while doing so made a very bearish reversal candle (check inset). Though this is no confirmation of a trend reversal as we are high above major moving averages as well as trend lines, but the fact is very clear that sustaining at these levels would be very tough for Nifty.

Lets take a look at the trading pattern that has developed in the 5500 - 6000 area. If we look at this region before the Jan 2008 top, we see large sell and buy candles, signalling confusion in both buyers and sellers. The region after the "Top" doesn't even need explanation, as foreigners put an end to all valuation debate in just 2 weeks. There was virtually no trading in this region, let alone the creation of a value area.

So in my opinion Nifty crossed the 5500-6000 zone two times, without having any substantial trading. The reason I am emphasizing this is because time spent by a stock or an index at a particular level states the fact that traders find value at those levels and not a bunch of FIIs having free money chasing returns.

Now what happens when Nifty crosses 5500 again in September? As no value got created ever in this zone, the Index as well as a majority of stocks zooms through this region. Apart from that market participants also know what I am writing, there is no resistance in this range. So the market follows a path which it itself prophesies. You can see traders talk if 5500 is broken, next target is 6000. Which I believe will be true on the return journey as well, if 6000 is broken, next target is 5500!

For Nifty in an intermediate term, the value area is 4000-5500 and investors should be buying at the lower end and selling at the higher end. Over 5500 market is definitely overvalued and greed and liquidity rules.
From the chart you can see how when 4000 got broken, Nifty went into a free fall, the reason being the opposite of what we see over 5500, fear and lack of liquidity.

If last weeks candle is indeed a reversal one, we will see a sharp fall in near term to 5500 and then good support at multiple levels. Only a break of 4000 should alarm investors.

The very same logic can be applied in the range between 2500 to 4000. I would expect Nifty to hit 2500 again if 4000 is broken. I think I am looking too far, but who knows sometimes random ideas are the most simple and accurate ones!