THE CURRENT MARKET PICTURE AND WHAT TO EXPECT NEXT !

NIFTY has everyone gripping their seats in anticipation of its next direction.

In the past few months we have seen this darling index swing up and down, pleasing and disappointing the participants of the market. It spent the first half of October falling to 7720 from a good 8200, followed by a rise which lasted to the very end to November scaling the levels of 8600, but since December, the index has been correcting those gains and has constantly failed at maintaining its stance above the 8300 mark of resistance. It was only on the 2^nd of Jan 2015, that nifty has managed to foot down 8300.

In the previous blog post I gave my interpretation of the Elliot wave counts for NIFTY spot chart, establishing a target of 8000 for the index in the first down leg (ended on 17^th dec), it was mentioned that a bounce back maybe expected when the index reaches 8000. As we know, NIFTY made a low of 7961 on 17th December, which is a little beyond the target, and has been rising ever since.

This naturally raises the question whether the correction is over for real, or are we being dubbed by an intermediary bounce in a correction which is meant to dig deeper. We do not have fool -proof answers to that, but some evidences from Technical Analysis can help us in drawing some conclusions.

1. The 4th tenet of Dow Theory- Charles Dow, the Father of Technical Analysis, has laid down 6 basic tenets of Dow Theory. In the fourth tenet, he has specifically spoken about the conformity in two market indices active in a particular exchange and acted upon widely by the market participants. The two indices of interest here are NIFTY and BANKNIFTY.

    Active market participants will know by experience that the NIFTY and the BANKNIFTY  follow the same direction on a daily and intraday basis. When one falls, the other is bound to follow sooner or later and vice versa. So naturally, it is important that they conform to each other in making ‘new’ tops and bottoms. If we look at the current market scenario, we will see that this is not happening , as BANKNIFTY is riding above 19000 which is the highest it has ever traded, and NIFTY is hovering around 8350-8400 which is nearly 200 points off the top of 8600.

     

         This may be considered as a sign of embedded weakness in the current market rally.

2. Negative divergence in BANKNIFTY and RSI- RSI stands for Relative Strength Index, a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:

           RSI = 100 - 100/ (1 + RS*)

       

         *Where RS = Average of x days' up closes / Average of x days' down closes.

     

         According to Wilder (the founder of this indicator), divergences signal a potential reversal point because directional momentum does not confirm price. A bearish divergence forms when the security records a ‘higher high’ and RSI forms a ‘lower high’. RSI does not confirm the new high and this shows weakening momentum. This is what is shown in the chart of BANKNIFTY below:

LINE CHART SHOWING NEGATIVE DIVERGENCE BETWEEN RSI AND BANKNIFTY 

3.  ELLIOT WAVE COUNTING, CONTINUATION INTO THE CORRECTIVE WAVE (B)- In the above two points there is stress upon the fact that there may come a fall in the market anytime soon. But when?

          According to the Elliot Wave count, we are in the corrective mode, which is marked as  WAVES (A)-(B)-(C). More specifically we are currently in the WAVE (B) which is itself formed of 3 minor waves marked a-b-c (market has a tendency to move in repetitive structures which appear in different time scales, its called FRACTALS). As per the rules, Wave-a and Wave- c can often be expected to be equal, so we can expect that the Wave- c will equal to Wave-a (400 points) and end at approx 8550 (= 8150+400).

CHART SHOWING ELLIOT WAVE COUNT AND TARGET FOR NIFTY

4.  TRENDLINE- We see in the above chart the extended trendline joining the low points of the previous rally happensto almost coincide with the predicted end of WAVE (B), which happens to be at 8550,  hence adding to the weight of evidences in proving 8550to be a major resistance zone.  

Hence, I conclude , the above evidences give a hint that 8550 is a major resistance level, which may push the market into it next down leg called WAVE C, the expected targets of which will be posted in the next blog. It is advised that high level of caution be maintained if anyone has current positions in the market, and those who are eager to enter the market and earn for themselves with a long term perspective, should wait till market has shed the points it is due to shed.