Nifty: Applying Dow Theory along with Elliott wave for trend confirmation!

Dow theory is the building block of technical analysis.

This theory has helped technicians for decades to understand the major trend of the market / index or stocks. Many Elliotticians do the blunder of giving up the most basic and important technique which helps us to stay objective at times when the forecasting tool like Elliott wave might give a few other probable scenarios. A combination of both of this technique is a lethal tool one can use and imagine when you combine this along with time cycles and momentum indicators to time the market! Trust me it gives a thrilling experience.

One such experience we had while catching a top at 9119 and later near 8845 levels. We have our records that speaks for itself along with various technical studies that helped us to capture the important tops weeks before!

Bottom Line: Nifty closed below 200 days MA will now be the key point of discussion across media forgetting the fact that the reversal actually happened near 8845 and now indicators are in oversold state!

Nifty daily chart:

Nifty 60 mins chart:

Wave Analysis:

In previous update we mentioned that “In short, Nifty has arrived at important juncture. Hourly close below 8250 will resume the downtrend with size of the bar will be important to observe whereas for any positivity move above 8370 will be necessary.”

Nifty had a minor positive opening but prices entered into red territory immediately and selling pressure intensified during the day. The intraday movement has been overlapping but the overall trend will continue to be negative as long as prices do not take out the high of previous day which is at 8335 levels.

Yesterday’s movement has taken out 200 days Simple Moving average which is a standard benchmark most of the analysts uses. As mentioned earlier a strong momentum below this average will further extend this current downtrend. Also now the bearish news will start floating across when the indicators have entered into oversold state and the fall of nearly 650 points has already happened. Case in point: It is better to use objective techniques mentioned above which helped us to capture the top near 8770 levels rather than getting carried away now with the news.

Nifty closed near the day’s low and the advanced decline ratio continued to be very poor with 215 advances against 1243 declines. There has been no bounce back in high beta sectors that was outperforming before and now shows drastic underperformance. So it is prudent to avoid catching a low and close above previous bar high will be first sign of reversal.

Prices have now taken out the previous rise in faster time and for the first time since August 2013 we are seeing very decisive lower highs and lower lows formation. This is the reason we are able to draw a clear downward sloping trend channel - the most basic and important concept of technical analysis that helps us to identify important trend changing scenarios over medium term. So it looks the overall market dynamics are changing from positive to negative and we have entered into sell on rallies strategy rather than buying on dips.

Over short term, as shown on 60 mins chart, the sharp rise towards 8505 was only wave x and the next set of downside correction has started. As long as the 8335 which is previous day’s high is intact the trend will remain negative. Nevertheless, the best of the downside move might be over as now we are approaching close to medium term channel support (shown on daily chart) which very few are looking at as the focus is shifted to 200 days MA. So the zone of 8020 to 8100 can be an important support area post which we should start seeing the upside retracement of the fall.

In a nutshell, faster move below previous low of 8270 confirms the reversal in medium term trend as per Advanced Elliott wave and as per basic and most important concept of technical analysis - DOW theory the upward trend started from 5118 in August 2013 is complete! Over short term use 8335 as trailing stop for short positions with important support now near 8020 – 8100 zone!

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