Wednesday, July 9, 2014

Bank Nifty: How to apply channels, RSI, Time cycles to understand trend?

The most basic concept of technical analysis is to trade in direction of a trend. But trend is a relative concept and it depends on the time horizon one is willing to trade.

For an intraday trader the trend changes daily, for a swing trader the trend is positive if the weekly close is above previous weekly high and negative if weekly close is below previous week’s low. For an investor, the minor fluctuations are least important but the trend is looked by confirming higher highs and higher low formation on monthly scale. So depending on the time horizon one wants to trade the trend will change. It is incorrect to simply state the trend is negative without the time element connected to it.

The below chart of Bank Nifty clearly shows how we identify trend from short term perspective which can assist for Positional or Derivative trader!

Bank Nifty Daily chart:
Elliott Wave Analysis:
Indian equity market dramatically reversed on downside in last trading session and closed with a loss of more than 2%. The sell off was witnessed across the board. Bank Nifty index which was unable to take out the high of 15750 made on Election result day, finally showed momentum on downside and lost 2.40%. It seems that Bank Nifty was just waiting for whole market to be in sync so that it can start its trending move on downside. Currently prices have arrived near the support of the range and looking at the sharp down move there is high probability that Bank Nifty will break consolidation range which is intact from last 35 trading sessions.

As shown in daily chart, from the mid February 2014 prices moved higher in upward moving channel. Internal wave counts suggest that in the end of June 2014 minor wave (iv) completed at the lows of 14950 and since then prices were drifting higher in form of minor wave (v). Now, break below 14700 will indicate that minor wave (v) has truncated at the highs of 15582 and correction on downside has started. RSI which gauges the internal strength of prices is exhibiting series of negative divergence which suggest that Index has been losing momentum on upside.

We have applied Time cycle of 318 days which is working very well. Most of the time this cycle has worked as a topping one. As per this Bank Nifty has made top at 15750 on election result day and since then prices were unable to take out the same which suggest importance of this cycle.

As shown in 60 mins chart, (shown in actual report)....

In short, all eyes should beon 14700 levels. Any break below the same will take prices towards 13000 where 50% retracement is placed of the prior up move from 10000 to 15750. 

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1 comment:

  1. It's an interesting post explaining the way to use Channels, RSI and Time Cycles to find out the trend.