21 August 2011

Nifty : Corrective Path

Last Four Weeks have been a forgettable one for Indian Investors. Nifty has dropped from 5700 to 4850 roughly in that time period. It roughly corresponds to 15% which is huge for an investor, who at times tries to gain that much in a good year! So for anyone invested in market especially who are directly invested, it must be have been really painful.

Without further delay lets get into the technicals and see if the pain is anywhere in the end. Firstly we should get very clear about the fact that this is the largest correction since October 2008 lows of 2250 and hence not a "healthy correction" towards making new highs. It will atleast do a minimum 38% (very bullish) to 50% correction (standard) retracement of the entire 2250 to 6350 rally. If it has some relation to the 2008 correction then we should expect Nifty to test 2250 again (Flat ABC correction) or come very close to it or break it (irregular flat correction). In extreme case if it has been an end to a long term bull market as described earlier here http://technically--speaking.blogspot.com/2010/11/nifty-long-term-view.html then hold your breath!

I am presenting two most likely scenario, which assumes that Nifty has ended a bull wave from 2250 to 6350 and is now retracing it. This is bullish because once this thing ends Nifty will be on course to make new highs.

The first and most likely path Nifty can take is presented below in the chart.

As mentioned in that chart, just a 38% retracement is almost out of contention, we can have a 50% or even deeper correction.

The latter and more bullish path is shown in the chart below. Where Nifty is in its last stages of correction and should start bottoming process now. Which basically would be some counter trend rally, another fall with less momentum, thus creating divergence. Hitting a target of 1.62 times wave A which is around 4530.

To be honest, though I will keep these scenarios in my mind, I don't think they will make a real bottom. I am pretty sure with either of these scenarios playing out there will be significant rallies. But they will soon fizzle out, they would be more of short covering and technical rallies which would just create more possibility of further fall. The reason I am saying this is because of the time taken.

In a bull market (long term charts of any price action), we see long periods of prices moving upwards, interrupted by shorter sharper corrections. Corrections by nature itself is violent and short lived. Just an example is how Nifty crashed from 6350 to 2250, all in 10 months of 2008 (4100 points in 10 months)! By comparison it has been 8 months now and Nifty has done only 1550 points. Which certainly means this correction looks to be a lot slower and has the potential to be the primary direction of markets for years to come. Will do some more finding on it. Till then be safe!


manu said...

good one

Post a Comment