Monday, May 27, 2013

Retake on Elliott Wave Analysis of Nifty: Target 3305

This is in continuation to my earlier analysis of the Nifty based on the Elliott Waves. I have already written two posts regarding this, one in January, just a few days before Nifty made the memorable high of 6111.80. In that post I had given a minimum target of Nifty to be 4300 but since the top had not been made as yet I assumed that the minimum target could be close to 4500 levels. Just days after that, the Nifty made a high of 6111.80 and started falling down heavily and came down to make a low of 5477, more than 10% down in a matter of days. That made us assume that the wave B was over and that we were now in the wave C and that the Nifty would move down to our perceived target levels. The second post's target of 5528 was given during this fall when the Nifty was still trading at around 5870 levels. The Nifty then did come down to 5477 and almost unexpectedly, started moving up and went up to 6230 and then started falling again.


I would suggest that before going ahead you read both of those earlier posts too so that you know what wave counts we are talking about. The rally from 5477 to 6230 was a surprise. We did expect a rally from those levels since 5500 was a good support for the Nifty, but not such a smart rally. We were assuming that the Nifty would come down to 4500 but in a 5 wave impulse wave pattern. Since wave 1 was already in place we were assuming that this rally would be wave 2. Of course, our counts would be proved incorrect if the Nifty were to go above 6111.80. We thought that wave 2, even though theoretically, can correct less upto 100% of wave 1, would stop near the 5800 levels. In fact, a move above 5970 caught us by surprise. A move above 6111.80 proved that our wave counts were indeed incorrect. We had to recount the waves and the only logical answer that came to mind was that maybe the corrective wave B moving upwards had not ended.

To see where it could reach, we had to do a renumbering of the internal waves of this wave B. It seemed to be moving up in a 5 wave pattern which did not seem to be an impulse wave  because as per the Elliott Wave Principle, one of the rules is that wave 4 will never enter the price territory of wave 1, but in this case it had. Moreover, a wave B is a corrective wave and should move against the direction of the trend in 3 waves. And if a corrective wave is making a 5 wave pattern, it is only possible if it is a W-Y-Z pattern where each of these waves is interrupted by another wave called wave X. This kind of wave pattern generally moves in channels and this was clearly visible in the earlier wave A too since that too had come down in a W-Y-Z pattern. The channeling starts from the beginning of the wave to the top/bottom formed at wave X. Then a line parallel to this line is drawn starting from the point W formed. This line gave us a target that the Nifty should hit a target close to 6250. And since now it is history we know that Nifty made a high of 6230. This can also be seen in the weekly chart of Nifty shown below and these two parallel lines are marked in orange colour.


Nifty Elliott Wave Analysis

But we are here to see the future, not to read about the past or the present. So, if we really have finished the wave B and are in for a wave C now, we should be going down in a 5 wave pattern because wave C is a motive wave in the downward direction. And if this is an impulse wave then we will come to know because an impulse wave should fully retrace the original wave in faster time. Unfortunately, the previous wave was too long which started at 5477 and ended at 6230 and it took 7 weeks to form including the candles where the low and high was made. So, if the next move of Nifty brings the Nifty below 5477 in less than 7 weeks then we can say that we have an impulse wave downwards. There are two conditions for that. One, that it must fully retrace the previous wave, which means it must go below 5477 and two, it must retrace in faster time i.e. we should be below 5477 in less than 7 weeks if we are in a downward impulse wave. So, it makes sense to sell below 5477 if the above conditions are fulfilled.

Selling below 5477? The Nifty is close to 6100 right now. Why wait so long? Do nothing till then? Well, we are traders and the ideal thing for traders to do is to never sit idle, unless the market is highly volatile and unpredictable. As investors, we should liquidate our position and sit on cash right now. For traders, the most prudent thing is to stay with the trend. The trend right now is downward and 6090-6110 is a major resistance for the market. So, with a stop loss above 6125, build a short position at current levels. Short positions could either be built by selling Nifty Jun futures or by buying 6100 June puts. We are expecting the markets to go down, unless the market decides to go the other direction (and if it does it should give us an indication before it goes). In case 5477 is also broken down within 6 weeks, we are looking at further downside.

So, based on the Elliott Wave Analysis, what levels are we expecting? Well, if our counts are correct and if we indeed are in an A-B-C correction and if the C wave has started then usually wave C is 161.8% of wave A. The minimum target of wave C is equal to the length of wave A. It could also reverse from important Fibonacci levels like 114.6%, 123.6%, 138.2%, 150% or 161.8% of the length of wave A. If we are lucky, we could see wave C which is as long as wave A (6338-4531) which is 1807 points. That gives us a minimum target of the Nifty as 4423. The maximum downside to the Nifty, as it looks right now is upto 161.8% of wave A, which gives us a target of 3305. The other levels of support in between are 4162, 4000, 3736 and 3520. The Nifty could decide to stop at any of these levels.

As far as the time frame is concerned, wave A lasted 13 months while wave B lasted about 18 months. Wave C should be formed in less than 18 months which gives us a time target upto Nov 2014. In fact, a good strategy would be to buy long term Nifty options expiring in Dec 2014. In fact the Dec 2014 6000 Put was today trading near Rs.360. If we purchase that right now, we start making a profit if Nifty closes below 5640. If it closes near our first target of 4423, we make a profit of Rs.1217 on one unit or Rs.60000 on 1 lot of Nifty. Increase the number of lot sizes based on your risk appetite.

There are others like +ankit sandhu who believe that Nifty is bullish and yet others like +Harsh Dixit who believe that Nifty may go down to 3700 levels, though with slightly different counts.

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