29 October 2011

Nifty : Trend Line Attraction ?

Recent rally has been a typical example of how stocks climb a wall of worry. There has been a sudden shift in sentiment though after yesterday's 3% rally. Now all the lower targets has been replaced by higher targets. Lets look at a chart to get some idea where we are technically.

The above chart shows Nifty (blue) and advance decline line (red). First lets focus on Nifty closing price, it clearly looks to be bound in the channel (black and green trend lines). There was a false breakdown late August, but respected in early October. Now Nifty is targeting the upper trend line around 5450-5500. If you notice, this trend line has resisted Nifty on 3 different occasions. So we can surely consider it to be a strong resistance. The red advance decline line has been falling consistently, we can argue it has bottomed, but will have to wait for further confirmation.

What can we expect from here on. Firstly, the test of the upper trend line by Nifty looks inevitable. So 5450 give or take some points is very much to be expected in near term. Now comes the difficult part, Nifty has been overbought in all smaller time frames other than weekly. So ideally we can expect Nifty to halt or maybe even correct (especially near a strong resistance) some amount to get rid of these overbought conditions. I would say even a retest of 5180 ( the break out area) might be possible and should be good for longer term bullish scenario. Though if sentiment remains bullish we may never see these levels and a 5250-5300 would be enough of correction. We can expect another stronger wave of buying from these levels, one which should see the upper trend line broken, which means 5700 as first target and 5900 as second. I believe even new highs are possible once the trend line is broken with strong volumes. Though it will take its own time.

Next possible scenario for me would be test of upper trend line and then back to the test of lower trend line, which would be much below 4700, I think 4500 would be a good enough target for it, if not lower. In that case these two trend line will still remain in play for future.

There is yet another scenario which I can come up with, which would be this rally to carry on without any pause at the trend line. This would be the most difficult one to play as logic would be overtaken by emotions. I feel in that case the rally can keep going on much higher or after sucking a lot of panic buyers Nifty will succumb under its own weight of expectation and fall below the broken trend line and keep falling much lower

Lets see if any of these happen or there is some other trick under Mr. Markets sleeve. As I always say, its not about getting your technical study right, its about being ready for any drama that unfolds. Being a trader, I keep my bullish hat close and bearish closer!


Anonymous said...

Good stuff..

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