Tuesday, June 4, 2013

Nifty Going Down, Maintain Shorts

Today the Nifty opened on a stronger note but soon started falling and within minutes it was in the red and from thereon, it was a unidirectional fall for the Nifty, except in the last hour and a half when it made a strong recovery, but not enough to bring it in the green. In the process, just after opening it made a high of 5996, in the mid-afternoon it touched a low of 5917, recovered to 5951 and then ended the day 46 points in the red at 5939. Well, the Nifty made it clear today that it is going down and going down a long way. But the small recovery towards the end could be a signal that a small bounceback could come.

Well, so, if the index really is going down, where will it go, where will it find support and what should we do? These are some of the questions that come to mind. These days, I have started using Elliott Waves too in my analysis, so let us understand that first. The rise that we saw from 14th May to 20th May from 5980 to 6230 took 5 trading days, the subsequent fall took it to 5940 (completely retraced the rise) in 4 days (in faster time) clearly suggesting that it was an impulse wave. This was reinforced by the fact that the next rise from 5940 to 6120 which took again 5 days was fully retraced (the fall taking Nifty to 5917) in just 2 days. We know that impulse waves take a direction in 5 waves. The direction clearly is downwards. Going by the wave count, we are now probably in the 3rd wave downwards. Wave 2, stopped its retracement at exactly 61.8% of wave A. 61.8% is a very important Fibonacci level. Wave 3, it is said, is never the shortest but is usually the longest (usually a minimum of 1.618 times of wave 1. The wave 1 fall lasted 300 points, which means that even if wave 3 is equal to wave 1, we get a minimum target of 5830. And if it is 161.8% of wave 1, we should be looking at a target of 5650. 

Nifty Supports and Resistances

Having said that, we all know that Elliott waves are always subjective in nature and there is always a chance that our targets may turn out to be wrong if our wave counts are wrong. While it's nice to be able to predict the levels we are looking at much in advance, we do not want a wrong prediction to have a negative effect on our trading. Therefore, we should always be looking to follow the trend. And the trend will remain down unless the Nifty manages to cross 6130, which does not look like a possibility now. So, we shall continue to remain short keeping 6130 as our stop loss. But of course, the possibility of a small bounce back cannot be ruled out. According to the Fibonacci levels, the bounce back could take the Nifty up to find resistance near 6000, 6030 or 6050. Attached above is an hourly chart of the Nifty which has various red lines and various blue lines. The red lines are all resistance levels for the Nifty and in the event of a bounce back, the Nifty could find resistance near one of  these levels. On the other hand, in the event of a continued downtrend, the Nifty may find support near one of these blue lines.

Nifty Bearish Head and Shoulders Pattern

Also attached above is the same chart of Nifty but without those lines. Instead you can see two red lines, a red arrow and some funny letters. Well, they are not funny letters, they are marking the shoulders and the head of the famous head and shoulders pattern that everybody seems to be talking about these days. I have drawn two lines because there is some confusion as to where the neckline should be drawn. In one of the cases, if you see the place near the red arrow, you see only two bars which heavily came below the neckline. And if we ignore those, we have an excellent Head and Shoulders pattern which has gone through the neckline and has even seen the usual pullback/bear trap. The target for this pattern is close to 5710. If we take the other line as the neckline then this head and shoulder pattern has not been broken as yet. But, for the time being let us assume that it has been broken. And if it has, then the pullback that we were expecting to see has already come about today and there may not be a further bounce back.

On a lighter note, I'll leave you with another Head'n shoulders pattern. And for this the target was always the big boundaries.

Mathew Hayden

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