Nifty: Moving in a Channelized Formation
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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