26 March 2011

Nifty : Breakout or Bull Trap?

Nifty has broke out of 5600 resistance on Friday and closed at 5654 with high of 5667. Volume was not convincing and it looked more of short covering than long formation. Rallies generally start with short covering, so that is acceptable. So should we take the rally as a break out? As you can see on the chart below, the 5600 horizontal line was taken out yesterday. If you see the intra day chart (not shown) you will see how once 5600 got broken there was a straight line of buying, which shows 5600 was a tough challenge and in the minds of many players.

What is also interesting to see is that, though the Nifty has cleared 5600, there are other tougher challenges.
First that I want to point is the channel's upper trendline, which it touched on Friday.
200DMA is at 5688 just 30 odd point higher from yesterday's closing.
I have shown Keltner Channel (green line band), for which the upper band is at 5675.
Apart from that Nifty had taken support at 5690, while correcting, so that can act as resistance.

So we see that things will not be easy for Nifty going forward, unless this is a genuine breakout and higher volumes are seen in coming days. If this is not a break out but rather is a bull trap, then we can see Nifty falling below 5600 very soon. Chances of a trend emerging is very high from now onwards. Either we are going to see upper resistances cleared and a strong rally to 5800-6000 or a rapid fall back to 5350-5400. The next week being expiry will make things even more volatile and looks like there is going to be blood on the street, either of bulls or bears.


alphabet1 said...

1. Keltner Support failed since February.
2.Resistance Line is better joining Nov 2010 peak and Jan 2011 peaks.
3. The chart you put up shows no sign of any Trap, till proven wrong.

Tarique Anwar said...

comments on comments:
1. in trending market every type of mathematical measurement fails. i have shown keltner as i feel we are still in counter trend
2. e wave channels join end of 1 to end of wave 3, similarly end of wave 2 to end of wave 4
3. trap is said to be occuring when a resistance/support line breaks, people enter in expectation of breakout but prices fall into the range, here 5600 is the trap line

alphabet1 said...

Here there is a presupposing the end of Wave 4, and if it happens so, then one more way to qualify the move would be "Exhaustion Gap".
it is three white soldiers on a gallop.

Tarique Anwar said...

Yes, the gap created on friday should be filled even, if we expect strong rally ahead. But coming back below 5600 would not be a great news for bulls, as falling back into the range, is never a great start. Volume is an important factor, 3 white soldiers would not attack if the volumes as its here is so low.

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