Nifty review January 28, 2008

While many of us are surprised by way the market had fallen this month, there were early indications in the medium term charts. A bearish “three inside down” candlestick pattern had been formed during the week ending January 18. Since the beginning of the current bull run, the Nifty has lost about 14% during the month so far, next only to May 2004 when it lost 17.4%. The other huge fall was during May 2006 when it lost 13.7%.

It can be seen clearly that the medium term support has NOT been broken yet which is a good sign for the Nifty. A close below this line would mean that the Nifty is likely to form lower tops and lower bottoms, indicating bearishness. What we may need to look for is a confirmation of trend reversal, which could take at least two to three weeks. Medium term investors may have to stay on sidelines till then!

When we go through the daily chart of Nifty, we can find that it closed below its support trendline between November 21 and 23, indicating a possible reversal. Though a close above 6012 was achieved the rally was unsustainable. So was the case again, on January 4, Nifty once again broke the resistance but only to fall down! The bulls were trapped!! Clearly the index failed to close above the original support trendline.

Where is Nifty heading towards?

The harami candlestick pattern formed on January 23 failed to provide a confirmation in the form of a green candle and a higher close. Nifty has not made a higher bottom and higher top as yet. If we apply the Elliott wave theory, corrective wave ‘a’ appears to be complete; pullback wave ‘b’ is now in progress. When wave ‘c’ begins, it could be as large as wave ‘a’ or even 1.618 times wave ‘a’. This means that the short term trend is bearish.

Where are the possible supports?

Going by the medium term support trendline, the support should arrive between 4475 and 4500. However, if wave ‘c’ extends to the length of wave ‘a’ then we might see even further declines.

What to do in the current situation?

A bull market may give the investor 'profits’ while the bear markets impart knowledge. Learning tricks of the trade is very essential in any business. Stock markets are no exception. It’s better to wait and watch till the market becomes bullish.