Nifty is forming a big Head & Shoulder pattern!

Nifty Daily chart

Nifty 10 mnis chart:

 Nifty daily chart above shows a Big Distribution Head and Shoulder pattern that replicates text book example of Edwards & Magee book. Head & Shoulder topping pattern is a bearish pattern and occurs at major tops. A confirmation of completion of pattern is obtained only by break of the neckline and unless that happens, acting on this pattern formation is not a good idea. We are closely observing Nifty movements and a break occurs below the recent low of 4640. Any close below that level will be extremely bearish for Indian equity markets and gradual fall will change to a steep falling market. However, unless we see a close below 4640 we shall continue to move in the red channel as shown on the daily chart.

To support our pattern analysis we are using On Balance Volume (OBV) indicator. This indicator is created by adding the volume to previous cumulative value if the close is above the previous day’s close. The value of volume is subtracted from this cumulative value if the close is below the previous day. This indicator is therefore showing that volumes have been more on the downside than on the upside and the value is at the levels of March 2009. This is very crucial observation as it indicates lot of volumes has been moving on the downside and less volumes on the upmove. This perfectly supports the right shoulder formation of Head & Shoulder pattern which suggests downside volume increases on left shoulder and upside volume decreases. Also OBV is a leading indicator and it leads the prices at important junctures. OBV has given break below the long term support line and so Nifty should do so very soon!

Over short term, as seen on 10 mins chart we are forming a short triangle that should give a breakout upside and index can move towards 5100. However we might be late in the uptrend and so we remain cautiously positive till 5100 levels. A move below 4850 will strongly indicate that the uptrend is complete and the next leg down has started.

In short, the bias is positive over short term but given the cluster of resistances at 5100 levels we would remain very cautious.