Monday, September 22, 2014

Nifty: Why knowing prior patterns is important for predicting future path ahead?

Bottom Line: Nifty consolidated after the sharp up move on Thursday. Weekly bar has failed to take out the high of previous week above 8180 which will be crucial for positivity to continue!

The below research is published today in "The Financial Waves short term update". For subscribing to this research on daily basis visit 

Nifty daily chart:


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Nifty 60 mins chart:     

Wave Analysis:

In previous update we mentioned that “Sharp down move followed by sharp rise can result into increase in volatility and becomes difficult to comment on sustainability… one should wait for clear higher highs and higher lows formation on hourly scale for getting a good risk reward ratio & trade setup!”

Nifty had a range bound movement on Friday between 8105 and 8160 levels. This movement came after the huge gains of Thursday that was a sharp reversal from the lows of 7925 levels. Many analysts are attributing for sharp rally of Thursday is contributed to FED stand of keeping the rates at record low levels. But the point is Indian markets had a Gap down opening on Thursday itself and if FED would have been the reason for strong performance than we should have seen a strong Gap up in opening hours. News usually follows the market movement that looks logical on the face of it but might not be completely accurate. Case in point is that it is better to adopt techniques like Time cycles and Elliott wave that hinted towards maturity of downtrend rather than betting on news else Nifty would not had a Gap down opening on Thursday.

Now coming back to charts, the weekly bar created in previous week had formed a lower high below 8180 and lower low compared to that of earlier week. It will be very crucial for move above 8180 for the current up move to be sustainable. Also as pointed out earlier many of the stocks are still struggling after the selloff of 16th September and so far have not formed a good base which is important for sustainable up move. To name a few stocks that has given up most of its Thursday gains are SBI, IDBI, ADAG group stocks, Yes Bank, L&T, Reliance Industries, Infosys, etc. Also note that these stocks are spread across different sectors that have retraced most of the upside move of Thursday. The point is even if Nifty touches new highs above 8180 levels the number of stocks participating is less. This is a typical characteristic during 5th or c wave formation. So the wave personality is also hinting towards topping pattern rather than a strong momentum on upside from here atleast for now. We will keep a close tab on the overall breadth and sectors to further gauge the momentum as and when 8180 is broken on upside.

Nifty has continued to move as per the path first shown on 5th September 2014 and we continue to stick with this scenario as of now. Over short term, the up leg from the low of 7940 can be first leg of wave c but since the reaction was steep without any meaningful base formation so we can see a pull back towards 8050 – 8060 levels before the uptrend can continue. This pull back can be sharpas shown by past history and also seen during the bounce back of August & November 2013. On other hand if prices manage to take out the highs of 8180 it will resume the uptrend in form of wave c of second correction.

In short, there is possibility of short term pull back towards 8050 – 8060 levels before the up move can resume. Nevertheless, break above 8180 will continue the current uptrend but should be with lesser momentum and number of stocks participating can eventually reduce!

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