Nifty forecasting using Volumes and its rate of change, Shift in market dynamics!

February 2016 had been a month of events and news with market moving in extreme pessimistic environment. PSU Banks were one of the worst performing sectors until 29th February i.e. the Budget day. Results declared by most of these banks were indeed very poor with stark rise in NPAs. The stock prices reacted sharply and started discounting the worst ahead. It was only later when the trend was due to reverse we saw sharp reversal on upside.

Budget day continued to act as a reversal day during a downtrend and this time it was no different. One of the most important concept that continued to suggest that the downtrend was in matured stages were Channels.

Pessimism was ruling not only among the retailers but institutional investors as well as brokerage houses as well. It seems majority of them sold off their positions just before the B-day at throw away prices in expectations that much lower levels are on cards and in anticipation that Nifty is heading towards 6500 sub levels. In fact Nifty movement towards 6825 was a perfect trap on 29th February and post that we have seen a recovery of more than 650 points now in just 4 days of time. This simply shows the risk of staying on the wrong side of the market and the risk associated with it.

Figure 1: Nifty weekly chart:

Volumes: As shown in Figure 1 we have seen significant rise in volume in month of February. Such sharp rise in volumes is not very often. The black Moving average line on Volumes clearly indicates change in the underlying dynamics and the same was observed only during low of August 2013  and lows of 2009. To further validate this assumption we have used Volume Rate of Change (Volume ROC) indicator that measures the speed with which volumes have increased. Such sharp rise in indicator and extreme level is not very often. It was only in 2008 and 2012 that we saw Volume ROC touching such extreme levels. Also in 2012 it was near the top rather than after sustained selling. So the only period when we saw volume ROC moving towards such extremity was during the low of 2008 – 2009. This further confirms that the dynamics of the market is changing and the downtrend that started from the March 2015 is probably complete. Also the methods that work well before might no longer be valid and we should not be surprised to see a break above the downward sloping channel encompassing the entire correction.

Confirmation from USDINR: (shown in actual research report – The Financial waves Monthly update)

Time cycle……

Nifty Neo wave analysis…….The Diametric pattern as shown in Figure 3

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