Gap openings seem to have become the order of the day these days. In the chart below, I have marked all the big gap open days with brown arrows and you can see how abundant they are. Gaps are like mistakes or anomalies in a chart and the prices tend to cover up their mistakes just like we humans try to cover ours. That is why you can see on the chart below that when prices open with an upward gap, more often than not, the prices tend to move down in the second half of the day. And the converse also holds when the prices open with a downward gap.
As traders who use technical analysis, it is our job to make sure that we take trades in which we have a higher probability of making profits. We can never be 100% accurate but if we increase the probability of profits (in the trades that we take) with the help of technical analysis then we’ll never go in a loss at the end of the month. But how do we increase the probability of a profit? By looking at the charts and seeing what the positives in the chart are and what are the negatives.
We are looking at the chart of Nifty everyday and are seeing that there are more negatives than positives. We know that we are in a short term downtrend, an intermediate downtrend and a possible (but still not confirmed) long term downtrend. We cannot go long and make profits, unless the trend changes to up. And that will happen sequentially, which means that first of all, the short term trend would turn upwards, then the intermediate term trend would change and then the long term trend. So, we should be willing to take positions when the short term trend changes to up. But the short term price movements are sometimes very sharp, so we have to be ready and should be waiting at the sidelines to enter whenever the short term trend changes to up. This means that we should know in advance that what is the level after which the trend will change and what is the probability that it is a true breakout. That is where technical analysis comes in handy.
Now, let us look at the positives and negatives in the chart above. The negatives first. As seen on the chart, the Nifty is finding resistance near the blue downward sloping trendline which is currently near 4675. The last pivot high was the high of the day today which is 4734. So, if the Nifty were to cross 4734, we would be in a short term uptrend. But from the chart shown in yesterday’s newsletter, we saw that there was a very strong trendline near 4750 on the daily charts and that is more likely to push the Nifty back than the short term uptrend pushing it up. And then there is the Relative Strength Index (RSI) which has made a bearish head and shoulders pattern, though it has not been confirmed as yet.
Now let us look at the positives too. One, the Nifty is finding some decent support near 4480 and it is likely that it may find support around those levels the next time it goes there. The second positive factor is the positive divergence visible between the price and the RSI. This means that the price is continuing to make lower lows while the RSI is making higher lows. This is a positive sign and signals that a change of trend MAY be near. And the third positive thing is that the last candle today is a doji which means that the opening price and the closing price of the last candle is almost same. We know that dojis are known to occur (mostly, though not always) at the end of short term declines/rallies. While dojis hold more significance on daily charts than on 60 minutes charts, yet the presence of a doji is a positive.
So, looking at the short term charts there are more positives than negatives. Yet, we cannot rule out the presence of a strong resistance line at 4750 on the daily charts. Under these circumstances, it may be advisable to wait until the price decisively breaks 4750. Though, unhedged long positions are not advisable on the Nifty now, yet buying some calls may not be a bad idea.
Happy investing!!!
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