Nifty: Moving in a Channelized Formation

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Nifty started gaining momentum especially after making a low of 5985 and moved up till 6723 levels in a span of one and half month and made a record high. This up move is very much similar to the move which occurred from December 2011 till February 2012 (marked by blue rectangle) where the index gained tremendously in spite of RSI staying in over bought zone for many weeks. This scenario is similar for the current rally as well, but how long this up move will sustain?

Even with the help of simple technical analysis like channels, retracements etc and use of candlestick patterns, traders can easily understand resistance and reversal signals.

Channels are two parallel lines which helps to know the support and resistance levels. From past 3 years Nifty is moving in a channelized formation. The formation is positive as it is making a higher high and higher lows, but on 31st March 2014 prices faced the resistance of the upper trend line of the channel and has also formed a hanging man structure (candlestick pattern) which suggests that there can be a reversal from here onwards. 

Hanging man is a bearish candlestick pattern that forms at the end of an uptrend. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up so that it closes at or near the opening price. Generally the large sell-off is seen as an early indication that the bulls (buyers) are losing control and demand for the asset is waning.

This formation does not mean that the bulls have definitively lost control, but it may be an early sign that the momentum is decreasing and the direction of the asset may be getting ready to change. The reliability of this signal is drastically improved when the price of the asset decreases the day after the signal. 


Now it is important to see the coming trading sessions as lot of events are lined up this week which includes RBI policy. 


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