Chances are that lots of traders / investors have missed out on the recent leg of the rally if the kind of messages and views floating about the Nifty is any indication. Many investors are guilty of calling a top in a uptrending market and this tends to destroy the capital without even realising that one is fighting the trend.
In this context, Arthur Ashe’s assessment of McEnroe where he said that a “little cut here, another one there, and pretty soon you’ve bled to death” is topical. If you keep fighting the trend, you keep taking small cuts (assuming you have a stop loss and stick to it) only to realise that your capital has been significantly eroded by these small cuts.
Why look for a reversal when price shows no intention or even signs of reversing. There could be a dozen reasons to expect a price-turn, but it turns when it does. Price gives a damn to negative divergence or a harmonic pattern or a slowdown in any indicator. The uptrend turns when the last buyer has bought and sellers take over subsequently.
Let’s take a look at the daily chart of the Nifty. The sequence of higher high and higher low is still intact and hence there is no reason to suspect or anticipate a reversal. Until the price falls below a prior swing low, there is no reason to even think of shorting this market. The swing low of some consequence in the daily time frame is at 7,961 on Dec.17, 2014. In this time frame, the trend, as of now, turns bearish only if the Nifty falls below 7,961.
Now, I do realise that it is impractical to wait for the price to fall 1,000-odd points before concluding a trend, but that is the fact based on the price action till date. Chances are that the price could make a new swing low (and this happens more often than not) in the near future and gives a better and practical reference point for trend reversal.
Have a look at the Daily chart of the nifty featured below.The near term target / resistance is at 8,970-9,000 range which is the upper red line. I have highlighted in the chart that the index has achieved its minimum target requirement if one accounts for the slop. Obviously, Nifty does not know that there is a upper red or blue line that it has to respect. We can get cautious IF price turns lower at either of these lines.
In the hourly chart, I would place importance to the swing low of 8,795 formed on Jan.23. Until this low breaks, there is no point thinking of shorting Nifty. Again, these levels are based off price action till date, but new higher swing lows will come by if price progresses higher.
Again, do not take a trade as soon as price breaks a swing low or high. There will invariably be another, low-risk trade opportunity on a pull-back.
Let me sign off with an important price reading tip. The Hammer (call it a Hanging Man if you wish) is a key marker. For those wondering why, give it a thought and I will explain it in a subsequent post.
As an aside, my long-term view on the Nifty remains bullish and my earlier mentioned target of 11k remains valid. Here is the link for those who missed my earlier post dated April 9, 2014.
Note: I do not have any interest or trading position in the Nifty. I might consider trades based on what price does in the future. I have a long-term portfolio comprising of mid n large cap stocks.