Hope you read my earlier post on the Nifty. The index is now on the verge of breaking the low at 8,269. If there is a decisive breach of this level, then it would confirm a bearish sequence of lower highs and lower lows in the daily as well as the weekly time frame. In the meanwhile, have a look at the daily chart of the Nifty featured below.
The Nifty conveniently chose to ignore the fibonacci retracement calculated off the prior rally from 8,269 to 8,845. Now, the next level of significance that every other person is talking about is the 200-day moving average (DMA). What is the big deal about price getting closer to this moving average?
It assumes significance because the technical analysis literature talks about this average as being a trend-decider. Long term trend is up as long as price rules above the 200-DMA is the consensus view.
So, it would make a lot more sense if one were to use this 200-DMA as a line in the sand rather than looking at it as a potential support. The price obviously does not know that there is a 200-DMA which has to be respected to help the cause of the beleaguered bulls. And, if one were to wait for a breach of the 200-DMA before concluding trend reversal then it might be probably too late in the day.
What I personally prefer is to use swing highs and swing lows to determine trend. Price is in an uptrend as long as it makes higher lows and when a prior low gets breached it is a sign of a potential trend reversal. As always, have a sense of artistic freedom while determining which swing low or high is crucial. A one-or-two bar pull-back in an uptrend may not be as significant as a pull back which has consumed more time and price. So, be aware of the context.
In the Nifty’s case, it has breached prior swing low at 8,471 in the daily as well as the weekly time frames. The subsequent pull back was arrested right at the resistance (detailed in the previous post). These clues suggest that Nifty is likely to be in a subdued phase for a while until there is a clear breakout past prior swing high.
As of now, the recent high at 8,845 is our reference point to decide if the downtrend is over. I can already hear a lot of irate voice shouting that with Nifty at 8,305, having a reference point at 8,845 is meaningless. Point taken. But, that is reference point as of now, whether one likes it or not. Please be reminded that the price will leave behind a much reasonable and realistic level if it heads lower. It it just that as of now, we have to live with 8,845.
Or, the least one can do before entertaining long positions is to wait for a breakout above 8,505 which is a relatively minor swing high formed last week. Once that high is breached, we can then wait for a subsequent correction to buy the Nifty, not for new highs, but a more modest target.
The point am trying to drive home is to be objective with your analysis and not to be swayed by intra-day or lower time frame moves. Have a perspective of where we are in the higher time frames and let that be your guiding force behind the decision making process. There is way too much noise as you drill down to the lower time frame that it is very easy to lose perspective and get chopped.
My expectation is that the Nifty would slide to the prior swing low at 7,961. I will hold this view until we move above 8,845. This does not mean that one should not look at long trades. There will always be instances where there is sufficient room to go long and make money even while the overall trend remains bearish. So, realise the context and do not aim for the moon IF there is a bounce sometime next week for whatever reason. Be realistic with your upside expectations and manage your positions judiciously.
Just as an aside, while the Nifty is yet to break the prior low at 8,269, the Nifty Futures has breached the corresponding low at 8,329 on Friday. Have your levels marked and wait for a significant resistance to be broken before considering fancy upside targets.
Note: I do not have any trading position in the Nifty as of today. I however own a portfolio of shares which includes Nifty constituents. I might consider trading positions in the Nifty next week.