Thursday, July 11, 2013

Upswing Expected After Triangle and Flag Formation

The Nifty was well on the way to our expected target levels of 4300 and below but was then interrupted by a quick and sharp upmove. These temporary corrections are expected on the way and in no circumstances do we expect the Nifty to go to 4300 and below in a unidirectional manner. Our job is not only to make a prediction on the direction of the market but also to trade on it. And while our predictions will help our trades to be more profitable but at the same time we have to be prepared for times when our predictions may go wrong. It is at times like those when we have to listen to what the market is trying to tell us. We just need to listen to the markets, they too have a language, and, believe me, it is not difficult to do that. Anyone can do that, all you have to do is to learn Technical Analysis.

But what is the market trying to tell us now at this time. I feel that if we look at the longer term market, we are going through a complex correction phase. According to the Elliott Wave Principle, a complex wave is that phase of the market which is most difficult to identify. And this is what makes the predictions very difficult. Well, we will then forget about the wave count for the time being because these wave counts as it is will keep on changing as the market keeps unfolding. I read somewhere that Sherlock Holmes once told his detective that if one eliminates the impossible then whatever remains, however improbable, must be the truth. Fortunately, Mr. Elliott has given us some rules and guidelines to work with through which we can eliminate the impossibles. Well, one thing is for sure, and that is for everyone to see that the move from the high of 5904 to the low of 5803 today is a triangle, as can be seen in the chart below. The waves within this have been marked as a,b,c,d and e in the chart below.

One guideline that the Elliott waves has given us is that a strong move, generally, follows the triangles. This move could be in any direction. And this move is usually the last move in a trend. The triangle just precedes a final thrust and therefore occur in wave 4, which is the wave before the last move in the concerned impulse wave B, which also happens to be the wave before the last thrust. I have had a look at the daily chart and from whichever angle I see, this cannot be wave 4 and that is an impossible. Therefore, what remains is that this has to be a wave B. And since the wave preceding this (the rise from 5567 to 5904) was upwards and was wave A, therefore, the next wave which will be the final thrust upwards will be wave C. And it is only logical for the market to change its course after wave C. So, now we know that after wave C the market will continue to go down, and that's what our analysis has been telling us that we are going down.

But what about this final thrust? Where will this take us? Well, if we are going to witness wave C now then it has to be upwards because wave A was upwards. Generally, A and C both should be equal in length both in terms of price and time. Wave A lasted a total of 6 trading days and traversed a distance of 337 points. If wave C is also equal in length, we should be looking at a target of 6140 in the next 5-7 trading days. Another possibility is that wave C may fall short and may be only 78.6% as long as wave A. That means a length of 265 points (78.6% of 337) which when added to 5803 gives us a target of 6068. Another guideline says that wave C should reach a line which is drawn from the end of wave A and is parallel to a line drawn from the beginning of wave A to the end of wave B. This line, though, not shown in the chart above gives us a target between 6090-6130. If we look at the chart carefully, the move looks like a flag pattern. A flag pattern also gives us a target equal to the previous upmove. That fits in line with our target of 6140.

For now, as the market is expected to go up for a few days, I suggest a short term buy strategy. This could be in the form of buying Nifty futures or Nifty 5800, 5900 or 6000 calls. The closing rates for the 5800, 5900 and 6000 calls today were approximately 99, 52 and 24. Be prepared to book full profits near 6080 or above. And then we should take a short position from there which will (or should I say, may) take us to 4300 and below.

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