Nifty seems to have
broken the neckline of an Inverted head & Shoulders pattern in today's
trade. The pattern was taking shape over the past few months and a look at the
chart will show that it is done with a rising volume.
For those who do
not understand Inverted Head & Shoulders technical pattern, here's a small
definition:
This is a very
strong bullish reversal pattern and meets its price target about 74% of times (as per
thepatternsite.com).
Left Hand Shoulder of the current pattern was
formed on 25th June 2013 with a Doji,
which is also a sign of reversal, after the markets fell tirelessly from the
highs of 6229 to 5609.The retracement after that took Nifty to almost 6100.
The next leg of downturn began with an Abandon Baby candlestick at the top and massacre
began in the market. This was 24th July 2013. Remember when RBI increased the
MSF rates by 200 bps, set restrictions on LAF borrowings and tried to impose
limits on students taking dollars away. Banks crashed heavily and any effort
of retracement was crushed. Markets went lower and touched 5118 on 28th Aug
2013.
This was the Head of the pattern.
The period after
this saw what we now call 'Rajanomics' or simply 'The Rajan Effect'. The newly
appointed RBI Governor, Dr. Raghuram Rajan, played a charm on the markets. He
touched all right nerves at right time (so far!) and markets danced to his
tune to rise to 6115 on 19th September 2013.
20th September was the RBI Policy
announcement date. Dr. Rajan was to announce his first monetary policy after taking office on 5th Sept 2013. Before
that, its important to mention that Ben Bernanke, US Fed Chief, had announced earlier that they would not be tapering their $85 Bn/month bond buying program in
September as was being expected by the markets. Atleast, not now.
The markets seemed ripe for a
correction after these positives were digested. On 20th September, RBI hiked
Repo Rate by 25 bps which spooked the market. Now, the neckline for the
pattern was in place.
Markets reacted
vehemently to RBI's stance which was followed by US shutdown. US shutdown was
initially expected to cause tremors across the emerging markets but later,
analysts started seeing uncertainty in US as a positive for the EMs. The fall
was arrested at around 5700 on Oct 1,2013 forming the Right Hand Shoulder of
the pattern. While US was battling shutdown and Debt Limit issues, Nifty
slowly but firmly kept rising. Any small correction, whatsoever, was getting
bought in.
FIIs Investment Activity during the period is a testament to that.
No big bang buying but
buying wherever there's value. Nifty tried to break the neckline on 15th
October anticipating IT bellwether TCS' quarterly earnings. But a late profit
booking soured markets sentiments. Once profit booking was over, the market
started to move higher. It broke the neckline at around 6160 levels today and
closed comfortably higher it.
Now if market
sustains above this level even for one more trading day, that would be an
indication that 6160-6150 will act as a strong support for the market from
here on. And in that case we will be looking at substantial higher levels for
Nifty.
Probably 7000!
Whenever an
inverted H&S (Head & Shoulder) pattern gives a breakout, the target
for the upmove is calculated as follows:
Target
= Neckline + Difference between the Head and the level of neckline on the day
Head was formed.
Here, Neckline on
the day when the Head was formed was approximately 6110 while the Head was at
5285.
Difference
= 6110-5285 = 825 Points
If the neckline
today broke at 6160, the target for Nifty stands at 6160+825=6985
As per Sensex/Nifty
ratio, that would make Sensex soar to 23,567!
Is there any other
indicator which supports this?
Well yeah,
apparently Elliot Wave states the same thing that we have stated above with
ultimate precision. Well, this Elliot wave began with the $85 Bn/month QE
program announced on 20th Dec 2011. Just take a look:
To know about
Elliot Wave in detail, read on: http://en.wikipedia.org/wiki/Elliott_wave_principle
The 'Elliot Wave
Personality and Characteristics' section of the above link shows that the
price movements have been nearly accurate as per Fibonacci retracement. Wave C
marks the end of this 22 months long Elliot Wave pattern. From August 28, 2013
new Elliot wave has begun. It has completed the first of the bullish waves
(Wave 1) on 19th Sept and the first bearish wave (Wave 2) on Oct 1, 2013. The
third and the longest bullish wave, Wave 3, is in the making. Closing above
the highs of wave 1 has confirmed the strength of the wave 3 and the breakout
above the neckline of the Inverted H&S pattern reinforce my faith that
Nifty/Sensex are all set to touch new highs!
Well, there are
fundamental reasons as well supporting this. The first one is the Current
Account Deficit (CAD) issue that we were grappling with a few months back.
Somehow, that seems under control as of now. Mr. FM looks determined to cap it
below USD 70 Bn and Chidambaram generally keeps his words (by hook or by
crook).
Additionally, there
are talks of India joining the global debt indices which can bring in some USD
20-30 Bn. And a window for future Dollar inflows.
A number of stalled
projects were given clearances and kick started in the past 6 months whose
effects will be visible in the next 3-6 months. This would kickstart the
economy which is hitting decadal lows on several parameters.
With gold imports
in check and a massive fall in international gold prices, this part is under
control as of now. Oil is also helping to an extent. Thus, suddenly, the sore
points are looking not-so-sore.
And hence the
optimism possibly.
With debt deal in
US and QE tapering postponed for the foreseeable future, there is a lot of
liquidity in the markets which can defy any bad sentiment.
Probably, it’s the
time to HOP on!
Abhijit Tambe, my colleague at IIM Indore,
suggested the Elliot Wave pattern/Fibonacci Retracement confirmation to the
Inverted H&S candlestick pattern for this article.
