Sunday, April 7, 2013

Bearish Head and Shoulders Pattern in Nifty? Target 5200

Thursday's close was a bit too hard for the Nifty to cross on Friday. Thursday's close was 5574 while Friday's high was 5577 and while the Nifty made at least 4 attempts to cross it decisively, it couldn't. Those are the signs of a weak market, of a market gripped by bears. the low made by the Nifty was 5534 but finally it managed to close a bit higher at around 5553, which was still 21 points in the red as compared to Thursday's close. It seems that the Nifty is still on its way down and with a much bigger target. There may be minor supports in-between which have been discussed below with the help of the charts shown.

A few days back when the Nifty was trading near 5870, in this column, there was a prediction that the Nifty is on its way down and the next target was 5528. That target was almost achieved today when the Nifty touched a low of 5534, just 6 points away. We shall now assume that that target has been met. Whenever a target is achieved, there is a need to reassess two things. One, has the rally or the decline ended or is there some more to it. Two, if it has ended then what is the likely trend ahead and three, what is the next target. We will discuss all this in this post today. But first let's have a look at the chart.

Nifty Displaying Bearish Head and Shoulders Pattern

 Attached above is the daily chart of Nifty. This chart shows a blue coloured trendline and also certain marks on the chart, namely, S, H and S. This stands for a Head And Shoulders Pattern, which happens to be a bearish pattern and shows more declines. In this particular pattern there is a shoulder made near 5800, the head near 6100 and the second shoulder near 5950. This pattern has been broken through, we have seen a small pullback after being broken through and now we are going down again. Given this scenario, the target for this bearish head and shoulders pattern works out to between 5180-5230. 


In my earlier post in which I had predicted a target of 5528, I had mentioned that we may be in wave 3 of the correct wave C and that wave 3 has a target of 5528 but if it happens to be an extended wave, we may see a target of 5254. The way I look at the corrective wave C and the wave 3 within that, this wave 3 doesn't look complete from any angle. In fact, for this to fit into the symmetry, it will probably have to go down to 5200, if not further.

Of course, there are supports in between and we can expect a small rally from those levels. But, beware. All rallies should be used to sell into. Sell futures or buy puts, do not buy anything on rallies. And the reason for that is that we are in a downtrend and we are likely to go down to between 4300-4500, as I had suggested in a post in January. Shown below is a chart which shows some possible support levels.

Nifty Showing Gap and Near-Term Supports

There is a support at the current levels where a brown line at 5530 has been drawn. As marked by the arrows, this line has provided support to the Nifty thrice already, and if it has done that 3 times, why not once more? It can, and hence, we should be careful. If we happen to go below this, we go into uncharted territory (at least, uncharted in the recent times) as there is a big gap left in this region, as has been marked by the brown arrow. Usually, in the case of a gap, there is support in the area from where the gap started and in this case it happens to be 5450. But if we happen to open below 5450 and do not cross 5450 all day, we are headed for a big big decline. If that happens then I can say that 4300-4500 is a very small and achievable target. So, just pray that we do not open below 5450 tomorrow. So, yes, on the way down to 5200, there are supports available near 5530, 5450 and 5300. Careful at these levels.

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Happy trading!!!