First of all – Heartiest Congratulations to NDA and people of India!!
After the election results are out with NDA forming the government once again, everyone is too bullish on the Indian Market. Big investment companies like Morgan Stanley are giving huge targets of 13500 for Nifty by June 2020. Is it actually that bullish or just a positive wave of NDA winning? Will this momentum actually last long? Before, accepting this….I would say Wait!
Let’s look at charts…They never lie… The charts are showing a different picture all together.
Below is the quarterly chart of Nifty which is currently showing some signs of potential reversal from all time high 12,041 made on May 23, 2019.
I have plotted Bollinger bands (lower, upper & average) as well as 20EMA (plotted in green color) on the quarterly charts. Nifty right now is over-stretched in terms of Bollinger band as it has pierced the upper Bollinger band (plotted in blue color) on Quarterly chart. Historically, whenever Nifty has pierced the upper Bollinger band, it has corrected to its mean (plotted in black color). For example, at the quarter ended in March 2015, the corresponding candle pierced the upper Bollinger band but closed below that. After that, the correction in the nifty took place and it reversed to the mean (quarter ended March 31, 2016) i.e. the average Bollinger band (black color). Another interesting fact was that Nifty bounced from 20EMA which was more or less coinciding with the average Bollinger band (plotted in black color). The correction was from 9100 (HIGH) levels to 6800 (LOW) levels which was almost 22-25% downside.
Current quarter candle which will be ending in June 2019, is forming an indecisive candle (or a doji) which means neither sellers nor buyers are in control. As the current candle has already pierced the Bollinger band, it is highly likely that correction in Nifty is going to take place. Big Question arises that how much is nifty going to undergo correction this time?
As the average Bollinger band is placed at 9400 levels which is also coinciding with 20EMA, the Nifty can correct to these levels in coming months. Interesting to note is that if this correction will take place then it will also be around 22-25% as it did in March 2015 – March 2016 (History repeating itself).
Let us now dig into the smaller time frames (Monthly, Weekly, Daily) charts now.
Nifty Monthly Chart
If we look at the Nifty monthly chart, I have plotted two zones Z1 & Z2 (or demand levels). Z1 is from 10101 to 9685 levels and the Z2 (just below the former zone) is from 9304 to 9075 levels. The Z1 has been tested three times in the recent past (Dec 2017, March 2018, Oct 2018). It is likely that if Nifty retraces to Z1, then it will break this zone and will bounce from zone Z2 i.e. from 9300 levels. The zone Z2 level is also the level I have mentioned in quarterly chart, so this monthly level also has a higher time frame support (which confirms the authenticity of the level).
Nifty Weekly Chart
The Nifty weekly chart reveals that there is lot of selling pressure at higher levels (11700-12000 levels). The long wick candle C1 shows that the sellers are in control at higher levels. The zone plotted in the weekly chart from 10864 to 10585 can act as a support level in the medium term but it is highly unlikely that this zone will give a new high in NIFTY. There are two reasons for this:
a) This zone has failed to achieve all time high in NIFTY on closing basis.
b) There is too much trading on the left of this zone, which means that there was already an accumulation of buy orders at this level which may lead to the breakout from 10900 levels to 12000 levels. Hence, if Nifty retraces to this level, it can give a bounce but will fail to arrest the fall in Nifty (if there will be) in the long term.
The zone plotted from 10000 to 9687 levels in weekly chart has been tested twice and is unlikely to hold if Nifty retraces to this level again.
The zone plotted in the weekly chart from 9217-9075 levels is the fresh and authentic zone from where Nifty can bounce if it falls below 10000 levels. Also, this level coincides with Quarterly and Monthly level.
Nifty Daily Chart
Nifty daily chart has formed a classic ‘Swing & Upthrust’ pattern. Spring and Upthrust are false breakouts that can trap the novice traders (Beware!). The candle C1 shown in the above chart was formed on April 18, 2019. The candle C1 made the all time high in NIFTY (11856) but it failed to close above this level. So, this level of 11856 acted as a resistance from April 18, 2019 till May 20, 2019. However, the market tried to breach this level on May 21, 2019 (candle C2) by making a high of 11883, but again failed to close above the resistance level. This was the first indication of formation of false breakout. On May 23, 2019 (candle C3) market again tried to breach the resistance level and made high of 12041 (due to NDA forming the government) but again failed to close above the resistance level. The candle C3 therefore, confirmed the false breakout (Swing & Upthrust pattern) as the close of C3 was below closing of C2. Although the elections result was as per the expectations - NDA winning the election and the result was in favour of the market, still the Nifty ended in Red. This is a good enough indicator of potential reversal which is also in coherence with what higher time frame charts are showing.
Conclusion: As Nifty is at the verge of correction, I would say that be cautious in investing at higher levels. Let the Nifty correct (patience is the key……till then wait and watch) and then try to enter the market at lower levels, so that you gain good profits. Another thing that provides strong indication that the Nifty will correct, is the global markets are not in good shape due to the USA & China trade war.