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The curious case of Nifty

Nifty look as if playing Snakes and Ladder and loving it. apparantly the monsoon has made the path too slipery for the NSE index. However, the season has been marytime for futures traders; a good hassle free rally on the up followed by an immidiate steepfall what more would a swing trader ask for. But gone is history lets unravel tomorrows mistery. The instant a gave a look to the daily nifty futures near month contract chart a neatly fashioned in process Inverted Head and Shoulders pattern appeared out of the blue, it got me curious to put up a set of examinations to identify the potentials. My major concern in this case is the untidy economic condition; rupee depreciation, the recent floods and political events in close proximity. A typical Inverted Head and Shoulders pattern denotes a strong reversal probability and much more accurately compared to peers predicts the change or deviation in mass psychology. In the recent trace of graphical denotion the pattern in Nifty futures contract on a semi-log scale looks reliable and shall follow examined charachteristics pin point. However, the pattern can be confirmed only after a break above the Neckline (shown In Chart) and cause i am cautious about volume and open interest on the break Bar it is best to verify the break with a crossrefferencing formula; i have used Chaikins Money Flow to be sure about the change in trend directional volume. A CMF (Marked and mentioned in chart image) absolutely concurs a breakout of pattern while trending above the vital zero line. Although, the left shoulder and head have already confirmed a positive divergence in sense of price to indicator comparison only a movement above the zero line is significant enough to rely on considering that fresh long positions are being established in the market. The next important criteria in consideration is the market strength usually a pattern like this demands for extremely bullish sentiments and phenominal buy power to be completely successful. The break day has to be a large range day with almost equal distance to displacement in price movement. What this means is that the day shall form a low near the open and a high near the closing price. And must also put forward a volume spike, this shall clarify buying interest and significantly improve the overall performance of the pattern. RSEX is another crossreferencing oscillator i usually use to check for market strength and potential left with the inclined trend in action. A 21 day RSEX (shown in chart and noted) used in this case shows a positive divergence and alongside also shows is higher than its own 9 period average. This is a distinctly bullish indication in a HNS pattern. Nicely placed at 55 around levels RSEX indicates an almost equal thrust power left with the current trend. Also, the dual moving averages concur the positivity a shorter period DMA has Crossed above the longer DMA and Prices have closed above the 50DMA. The average resistance fear in nullified in this scenario along the session on Friday. However, a long signal would be generated only after a break above the Neckline and all traders with no exceptions must wait untill this event. On the breakout there lies the possibility of a retest of the Neckline. More than 50% of the time an Inverted HNS pattern influences prices to retest the significance of Neckline, once the validity of neckline is confirmed the Targets we are in virtue of lies firstly around 6200 levels and furthermore.

But, i would consider going for 6200 levels exiting and then sit in a wait and watch position for a couple of sessions before considering any fresh idea. On the other hand a failure to Breakout of the pattern would make one of two probabilites either it would turn out to be a complex HNS which would falter decesion making and would test the patience of traders or would continue to fall after a failed struggle to break above the Neckline this would creat an extremely pessimistic environment and a fall below recent bottoms would open the gates of hell. I would like to conclude saying that it is in best of interest to understand that we are in a range from about 5500 to 6200 on Nifty and every trading opportunity must first realize the potential and should not hurt to sit on the wrong side. So, my advice would be to wait for a break and go long book profits closer to upper end if not so be reluctant to Short sell unless established bottoms are taken out.

Disclaimer: The above article is not intended to influence any sort of investment nor is a recommendation for trading any mentioned stock. it is to be utilized solely as an illustration for educational purpose only.

Shounak Pohankar Managing Director, Shounak Pohankar Financial Services Pvt. Ltd. For any queries relating to todays and previous articles write to author on Shounak@shounakpohankar.com. For further information on related topics visit www.shounakpohankar.com