Failure to respect the key support and resistance levels indicate only one pattern that was or is in progress – TRIANGLE!

Nifty Daily Line chart:

Nifty broke below the key support level of 5335 and moved down impulsively till 5200. This was strong indication that markets have much bigger down leg pending. But Friday’s rally proved that to be a “False breakout” and market moved up strongly taking everyone by surprise. Firstly there were fresh long positions built – up and seeing sustaining rally bears started to panic which led to short covering and Nifty moved up steeply and closed the day with a big white candle gaining 150 points which is more than 2% move up.
The only pattern which justifies these kinds of erratic movements and no respect for key support and resistance levels is “TRIANGLE”. Triangles are very tricky patterns and consist of 5 legs all of which are corrective and 3 wave structures. We can see that all the legs up and down have been in 3 waves and net directional movement is just consolidation.
Markets have not done much since the correction started in November 2010 but everytime built false hopes in either of the directions trapping both bulls and bears. It has now become a norm for Indian markets to break the key levels but have no respect for that level and just take a “V” turn later. These types of movements are both emotionally and financially draining and worse for trend followers. It looks like market has been rewarding oscillator traders and break of any key levels should indicate opposite stand.
We now expect 5600 level which has been such a strong resistance zone to be broken and prices might rally till 5650 – 5700 thereby creating false hopes and trapping people on upside above 5600 and will turn lower trapping the bulls that are entering at higher levels above 5600, it being very strong resistance. However given the current structure of market which is way too dynamic to predict and non-trending moves over medium term we would be very cautious and would not make firm statement on where we are headed in few weeks’ time.
Over short term, it will be very crucial to observe how markets open today and if Friday’s high is taken out on the opening session near 5478 and if market can sustain there. Sideways action or follow-up rally will be positive for further direction and any drift lower again will be wait and watch scenario…