Trader#39;s dilemma: Nifty in breakout mode on daily charts, but stuck in a range on weekly basis

February 11
15:02 2019

Shrikant Chouhan

In the previous week, the market managed to cross 10,990 along with broader participation of sectors and positive news flow form the domestic economy. Cut in interest rate helps an economy revive in the long run, though initially it hints either at economy being heated up or may slow down due to falling inflation rate.

By closing above the level of 10,990 on Wednesday, Nifty has given price break out on daily basis, however, it failed to close above the same on weekly basis and that has triggered dilemma in the mind of traders.

Technically, we are of the view that it’s a valid breakout and chances of (Nifty) hitting minimum 11,250 and maximum 11,400 are bright. Current weakness is mainly due to an uninterrupted run up from 10,580 to 11,180, without any meaningful correction.

It has developed confidence among long traders especially after crossing 10,990 and it resulted in sharp increase in Put Call Ratio and fall in India’s Volatility Index, which suggested overbought status of the market and generally invites short-term correction in the market.

On the closure of the event, too, we can expect correction especially if markets are in the same direction. However, it’s technical in nature and after correcting bit we expect market to turn back. Technically, markets would arrest between 10,950 and 10,850 as Nifty is having major support between 10,950 and 10,850.

In fact, falling to 10,870/10,850 levels would be an opportunity for contra traders to take contra bet of initiating long positions around the same with a final stop loss below 10,800.

However, traders should be eager to take profit on short-term positions between 11,050 and 11,100 as it could be highest point of the right shoulder of the broader formation of Head & Shoulder, which is a bearish set up in technical analysis.

The left shoulder is formed at the end of an extensive move during which volume is noticeably high. After the peak of the left shoulder is formed at 11,170, there is a subsequent reaction and prices slide down to a 9,951 which occurred on low volume.

The prices rallied to form the head with normal or heavy volume at 11,760 and subsequently saw downward reaction accompanied by lesser volume.

The right shoulder is formed when prices move up again but remain below the central peak called the Head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder, which is at 11,170.

Volume is lesser on the right shoulder formation, compared to the left shoulder and the head formation. A neckline is drawn across the bottoms of the left shoulder, the head and the right shoulder, which is approximately at 10,000 levels and could be first target if market corrects from here.

The author is VP Technical Research of Kotak Securities.

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