Nifty headed for 14600s?
MARKET UPDATE 14th JUNE 2022
Yesterday marked an important day in Nifty's price movement. When Nifty 50 opened with big gap down of nearly 300 points and fell further couple hundred points during the day, it did something most technical analysts and traders were dreading.
In yesterday's move the index breached the key support level of 15680.
This level had been made important by price action on 2 past instances. Please refer to the images for visualization as you read on for better understanding.
1) 1st June '21- 3rd August '21 (315 days ago) - For nearly 52 days Nifty consolidated in a 300 point range of 15915-15615. It finally broke out on the upside on 3rd August 2021 and a breath taking rally of ~17% was witnessed in the following ~80 days.The 200 EMA also played a key role in indicating this breakout back then. Now if you look closely at the image below, the level of 15680 acted as support multiple times within this choppy sideways movement, establishing its importance for the first time.
2) 8th March 2022- The second instance of commendable price action at the level of 15680 was witnessed when price corrected a staggering 14.5% in 50 days between 18th Jan '22 to 8th March '22. Then right off the level of 15680 Nifty jumped up sharply to rally over 15% in only 28 days.
Coming back to the present day, today morning in the opening hour, Nifty took another dip below 15680. It has been registering a climb since then which in all honesty does not look very promising for the following reasons.
1) RSI (25 period, 75minutes) - It is at 30 in this 75 minute chart which indicates it is over sold. If you look closely, there was a brief dip below the level of 30. The RSI is 25 period and not the standard 14 period. Using 25 period RSI allows for consideration of price data from 2 time frames higher when generating signal. So with time frames weekly, daily, 75minutes, I am considering the data of the last 1 week (25period X 75minutes each= 1875 minutes = 5 trading days X 375 minutes per day(1 week)) when reading RSI signals.
Studying the RSI for signals tells me there are two events at play here.
a. The RSI being oversold indicates a small and temporary bounce maybe witnessed in the market. This theory is supported by two recent events which usually command a follow up price action:
ii. Trendline breakdown (further details below) calls for a Pull back to the decisively broken trendline
i. Big gap down from yesterday's deep red opening calls for a reverse movement to fill the gap before further price correction.
This event can last anything between 2 days to 7 days and register a price movement of anything between 300 to 600 points with strong resistance at 16300.
b. The RSI having breached the level of 30 slightly indicates more weakness to follow over a broader time period of 30 days. Further details on possible price action mentioned below.
2) Support trendline breaking down - The big gap down opening mentioned above did major damage to the Nifty chart by decisively breaking the trendline which had been kind of supporting Nifty's price over the last month. This trendline was another supporting factor on the 8th March '22 in addition to the 15680 level after which Nifty had bounced back strongly.
The break of this trendline turns it into possible resistance by the principle of fungibility if Nifty tries to rally.
3) Next best trendline support- As marked on the chart below, ever since the start of this correction, Nifty has bounced back 2 times from the same trendline. This forms the next best available support for the index if this correction persists. As you can see on the chart, the next best trendline support is not close to the current price of Nifty.
Overall, I would expect weakness to continue in Nifty over the next month after an immediate small relief rally lasting anything between 2-7 days.
In addition to the above mentioned factors indicating price weakness there are socio economic factors like rate hike in US and India (less liquidity), growing inflation (loss of real value), supply chain disruptions (companies being willing to supply goods and consumers demanding goods, logistics hinder business) which in my opinion will also contribute to further market weakness.
There is another more complicated technical evidence of Elliot Wave count which indicates the end of an Impulse Wave and beginning of a Correctionary Wave at the Primary Wave level. Those who know Elliot wave will probably understand the gravity of the last sentence.
Over the next 30 days, more weakness is expected in the market. I am eyeing the level of 14630 (-7.25%, ~-1142 points) from CMP.
Thank you for reading. Please share you thoughts on this article via commenting below or email me directly at email@example.com