Sunday, March 17, 2013

Nifty Weakness Continuing, Next Target 5528

As I have been saying since over two months that the Nifty looks weak, the Nifty, as if listening to my analysis is doing exactly as I am predicting. This is not a good sign, at least not good for me. And the reason for that is that the market does not listen to any analyst and moves in a fashion known only to itself. And since there are a limited number of movements that the market can show, a few analysts may have their good days till the market decides to bring them back to Mother Earth. Not a good sign for me, because I'm having good days these days and only the market knows, how many days to prove me right. But, never mind that, my job is to analyse the markets and take trades in the direction of the trend and not try to fight and change the trend when the markets decide so. 

Nifty chart showing hammers and hanging men

As can be seen in the Nifty daily chart above, we see that the market has seen a correction of the bigger primary uptrend and a correction of the smaller intermediate down trend and is now waiting for a direction to take. Also marked on the chart are some small black arrows. These arrows mark the candles having long lower or upper shadows. Such candles in the candlestick pattern charting method are referred to as a 'hammer' or as a 'hanging man'. A simple visual glance will tell you that the prices find it difficult to break these highs or lows and it is only after a long time that such shadows are broken through. Such a candle with a long upper shadow and a candle with a long lower shadow exist close by. One candle was formed about 3-4 days back when the Nifty made a high of this current rally at 5971. The candle with the long lower shadow is the second last candle in this chart and has touched a low of 5791. On Friday, the Nifty closed at 5872, almost exactly midway between these two points. These two levels should be of utmost importance to us right now.

So far the trend is down and we shall assume that the low of 5791 will be broken soon and should start taking short positions below that level. A support will be found at the previous low made last month at 5669, another 'hanging man'. Alternatively, if the Nifty does not decide to trade below 5791, then we should be looking at a break above 5971, which should then be used to build up long positions. One thing to note is that since 7th of Feb, the Nifty has made a high between 5969 and 5978 four times, two out of which were made at 5971. So, this level of 5970-80 is going to be more difficult to break than one would imagine. 

A few days back I had done an Elliott Wave Analysis of the Nifty where I had given an ultimate target of 4300 for the Nifty. Now, that target may come or may not come. It is for the market to decide that. What we know is that we are heading that way if our counting of the waves was correct. And, if the Nifty were to cross the previous high of 6111.80 then it would be a clear indication that our counting was incorrect and we will have to renumber our wave counts, thus giving us new targets. If the Nifty were to go to 4300 or close to that (4500-4700), that would mean that our numbering is correct and will build up more confidence in the analysis. Right now, the Nifty is behaving like we were predicting, so there is no reason to believe that our numbering was incorrect. In that earlier Elliott Wave Analysis, we were predicting that we were in wave B of  the corrective wave of the cycle degree. Wave B now seems to have ended and we are now in wave C for which the target close to 4300 was predicted. Wave C of the corrective wave is a motive wave and will hence move in a 5 wave pattern formation. According to my analysis, we have completed wave 1 and may have completed wave 2 also, though, that is yet to be confirmed. Wave 1 of the C wave started from the high of 6111.80 and ended at the low of 5668.60, a movement of 443.20 points. 

Are the prices following the Elliott rules?

  1. Rule 1 says that wave 2 cannot go beyond the start of wave 1. That it did not and that is why I say that if the market goes above 6111.80 that would prove that our counting was incorrect.
  2. A guideline says that wave 2 usually retraces 61.8% or sometimes 78.6% of wave 1. And we found that after making a low of 5668.60, the Nifty should have closed near the 61.8% retracement of 5940.59. In fact, the Nifty made two closes of 5945.70 and 5942.35 on 8th and 11th March respectively, right at the 61.8% retracement level. That is my reasoning of saying that the wave 2 also might have ended. Although, it could make a further upward move upto 6016 (the 78.6% level) but that should happen before the low of 5668.60 is broken. 
  3. Rule 2 says that wave 3 is never the shortest in the 5 wave series, but is usually the longest. If that rule is to be followed , for it to never be the shortest means that wave 3 should be at least 443.20 points long, which if measured from 5971.20 gives us a minimum target of 5528.
  4. Another guideline says that if wave 3 is extended, it could extend to 1.618 times the move of wave 1. If this wave 3 happens to be an extended wave, then we could be looking at a move of 717.10 (443.20 x 1.618) points from 5971.20, giving us a target of 5254.10. 

Now that remains to be seen where the Nifty goes and finds support. If you need to read about Elliott Waves you can buy or download a book from sites like Amazon, books.google.com or Indian sites like flipcart.com, Homeshop18.com, Indiatimes.com etc. Take a look.

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