Nifty has corrected steeply over the past weeks. In the last Nifty update, the macro reasons behind the steep fall in Nifty were stated. In the following days I also posted about the bearish engulfing pattern which had emerged on Nifty\’s Daily chart and indicated further weakness with an infograph on my facebook page.
Nifty went on to breach the 10200 low exactly as per the analysis stated and closed near 10150 level today. However, the bear trend has been going on for a while now and few evidence on the charts plus an inter-market factor indicates that bears might want to take a step back (temporarily only) for now and let the falling Nifty take a break from all the chaos.
Evidences indication pullback on Nifty\’s chart:
1. Appearance of the Spinning Top: The candle stick pattern formed on the daily chart of Nifty is a reversal pattern. The spinning top is a pattern which indicates indecision and represents struggle between the opposing forces (bulls and bears) which determine the trading prices.
The image below highlights the spinning top and explains the significance of the pattern. The occurrence of such indecisive pattern close to importance support levels is often an indication of bear trend reversal, even if its temporarily.
2. Trendline support: Trendlines offer strong support/resistance zones. Nifty has reached one such strong support level which I believe may help the index take a breather before resuming the corrective movement against the primary trend. The resistance by virtue of another trendline lies at the level of around 11100.
3. RSI Positive Divergence: RSI is my favorite indicator. It is a leading indicator and has on several instances given superb signals of trend reversals. Nifty\’s daily chart has shown one such positive divergence. A positive divergence occurs when the indicator does not forge a new low as compared to the price. This divergence is a hint towards underlying strength. Again, the occurence of the positive divergence near a trendline and close to the oversold zone increases its potency.
The above three factors are purely technical related. An inter-market factor which also indicates that a reversal in Nifty is due is the weakness in Crude oil price. It has fallen over 5% on 23rd Oct that is today. Crude oil price and stock market are inversely related. Rising crude oil price was a major factor behind the falling stock market price over the past few months. The weakness therefore is expected to provide some strength to the index.
The above 4 factors are in my opinion sufficient to keep the index from sinking further in the immediate future. The rest will unfold with time, till then, adios!