Nifty reaction to RBI action and Elliott wave structure

The following research is published on daily basis by Waves Strategy Advisors. To subscribe to daily research report "The Financial Waves" write to helpdesk@wavesstrategy.com or visit www.wavesstrategy.com

Bottom Line: Nifty reacted sharply lower yesterday on back of RBI action on Monday evening to curb liquidity and check Rupee slide.

Nifty daily chart:

Nifty 60 mins chart:

Wave Analysis:

The Financial Express: “The Reserve Bank on Monday evening announced a slew of measures like raising cost of borrowing by banks by 2 per cent to 10.25 per cent and announcing sale of bonds worth Rs 12,000 crore through open market operations to suck liquidity to check rupee slide.”

RBI’s sudden action in order to check Rupee slide looks to be more of an impulsive action resulting Rupee to appreciate to a level just seen 2 trading day’s back i.e. on 11^th July itself we can see a low of 59.38 and yesterday Rupee closed near this level only. The desperate step taken by central bank does not look to be of much use for USDINR. Indian currency after sharp depreciation has already been appreciating from 61 levels. The action looks to be contradicting the previous stand where RBI has reduced repo rate since Jan 2013 except for last time. History shows that Government’s action only extends the problem rather than solving it. In short, USDINR trend has been down from 61 levels since 8^th July and we have been expecting 58 to 57 levels for this downside correction.

Indian markets reacted sharply lower and had a Gap down opening of almost 100 points near 5930 levels. Prices consolidated between 5965 and 5910 levels for the rest of the day. The big Gap still remains unfilled on upside but as shown on 60 mins chart the level of 5900 remains protected on downside. Prices however broke the neckline of Head & Shoulder pattern and re-entered into it. In June, we have observed break of 5600 levels on downside resulted into wedge pattern break but prices reversed back and re-entered into this pattern on upside. Currently, Head & Shoulder pattern gave a breakout on upside from 5950 levels but prices reversed and re-entered below the neckline. Such failure of patterns on either side typically indicates triangle or contracting activity. We will not be too bearish on failed pattern since it seems to be occurring within a triangle pattern. On lower degree we have observed that prices have been forming Gaps between 5750 and 5900 levels but filling it the very next day and Gaps carrying no significance. The movement was also between contracting or congestion period and so Gaps did not carry any weightage between 5750 and 5900.

Similarly entire wave (e) since April 2013 from 5500 level is probably forming triangle pattern and prices are currently in wave c of this pattern. A move below 5900 will indicate wave c is over and wave d of triangle has started whereas any move back above 6010 can result into move towards 6100 on upside. We do not completely rule out possibility of 6200 on upside but looking at the internal structure of wave c and recent failure of patterns on either side is increasing very high possibility towards triangle formation in wave (e). Once this wave (e) gets complete one should expect the next bigger degree of downtrend to start.

We do acknowledge the fact that given recent events of pattern failure and sector / stock rotation, trading is extremely challenging. Markets are giving breakouts from important patterns but are failing it again and again. We re-iterate that this happens in consolidation patterns and so Risk management & Money management plays vital role since in triangle all legs are corrective and predictability gradually reduces.

In short, it is now important to observe which direction Nifty breaks. Move back above 6010 can result into positive possibility towards 6100 whereas any move below 5900 can take prices back towards 5750 levels.

The following research is published on daily basis by Waves Strategy Advisors. To subscribe to daily research report "The Financial Waves" write to helpdesk@wavesstrategy.com or visit www.wavesstrategy.com