Nifty Displays 'Three Black Crows' Candlestick Pattern

There was good news from the American and Asian markets this morning. The Dow was up 266 points and all Asian markets were between a percent to two percent in the green. Because of these reasons, the Nifty opened with a positive bias and continued to take prices up throughout the day. With so much of cheer the world over, our markets happened to be cheerful too and the Nifty ended the day 123 points in the green while the Sensex closed 495 points above yesterday. There was good news from Europe as well. The closing was good two. Both the London FTSE and the French CAC closed almost two percent up while the German DAX ended with a gain of a percent. The news from around the world may not be all that good tomorrow. The American markets opened in the green today and while the Dow Jones has lost all its gains by now, the Nasdaq is already in the red. The crude front is also not looking all that healthy today with the crude already trading above $127 a barrel.

Attached above is the daily chart of Nifty. The Nifty, as can be clearly seen, has reversed after testing the top of the trend channel. This was expected since the 4180-4200 support is quite a strong support. Yesterday we did see the Nifty go down to a level of 4160 intraday but it closed at 4190. If we have another day of upmove tomorrow and if the prices were to go above 4350, we would have a pivot low in place at 4160. A pivot low formed at 4160 would mean that the Nifty has finally formed a pattern of higher highs and higher lows, which would bring the Nifty back in an uptrend. Back in an uptrend means, we should be buyers now and our stop loss for all long positions should be the most recent pivot low at 4160. But before we go on to buy, we should be aware of the different definitions of an uptrend. Technically, a stock (or an index) comes back in an uptrend when it goes up, comes back down to form a low (which is higher than the previous low) and then goes back up above its previous high. Quite often the prices first go on to make a higher high (like the Nifty displayed this time around) and then form a higher low. Here there are two schools of thought. One says that the uptrend has started, whereas the other school waits for the prices to go back above its previous high (in which case it makes it two higher highs and a higher low) before buying. Needless to say, the second school of thought has a much better chance of making a profit. And it is also understood that it is the first school which buys at a cheaper price and makes more profits if the signal turns out to be correct for them.

I would normally side with the first school rather than the second but it all depends on the situation. At present, if the Nifty were to go above 4350 tomorrow, there is resistance close by near 4480 (this level will keep reducing every passing day) as suggested by the trendline. What if the Nifty were to reverse from this level? I’ll be making a profit of only 100 odd points, which is not much. Also, there is likelihood that the candlestick pattern formed here is that of ‘three black crows’, which gives a very negative outlook to the Nifty. Had the small narrow range blue candle, formed on Monday, not been there, this would have been a classic ‘three black crows’ pattern, which happens to be a reversal pattern. It is the presence of this blue candle that creates doubts. The ‘three black crows’ candlestick pattern usually follows a period of strong advance and within this pattern three black(in our case, red) candles/shaded candles are formed with non-existent or small lower shadows. These three candles have lower highs and lower lows. Usually, the fourth candle is a white/blue/unshaded candle but could also be a black/red candle. The fifth or the sixth candle, generally, takes the prices below the low of the ‘third crow’. If this does turn out to be a ‘three black crows’ pattern (ignoring the blue candle formed inbetween the crows) and the low of 4160 is broken in the next one or two days, we could be looking at a retest/breakthrough of the 3800 lows too. For now, I would much rather stay with the second school of thought and buy only if the Nifty were to go above its previous high of 4540.

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Nifty Breaks Down, Support Between 4160-4180

The Nifty opened flat today with a slight positive bias. But soon after 11AM the RBI Credit Policy was announced in which repo rates were increased by 50 basis points to 9% while the CRR was increased by 25 basis points to 9% with an effort to reduce inflation. Though, a rate hike was already discounted into the prices, a 50 basis points hike was not expected. Most participants, with inflation figures stabilizing near 11.8-12%, were expecting a 25 basis points hike. Hence, when the news of the hike came, the markets tanked and then just couldn’t recover throughout the day. Finally, the Sensex ended the day with a loss of 557 points while the Nifty was 142 points in the red.

After yesterday’s dull day, it was clear that the Nifty didn’t have the steam to go up despite its going above the resistance line. Attached above is the 30 minutes chart of the Nifty. We can see clearly that the Nifty today broke through the support marked by the upward sloping trendline numbered 1. As expected, there was additional support near the top of the trend channel between 3800 and 4180. While the Nifty did go below the 4180 support, it finally closed the day at 4190. Now the first support available is between today’s low near 4160 and the top of the trend channel, 4180. If the Nifty does manage to go below 4160, the next support comes in at the trendline marked 2 near 4100. There are other supports too below that near 3900 and 3800 but for tomorrow, I don’t think we need to look beyond the 4100 support.

News from the international front is better too. While the European markets closed flat, the Dow Jones is up almost 200 points. There is good news from crude oil too. It did lose about $5 today but at the moment it is trading with a loss of $3 for the day at $122 per barrel. If the Asian markets too remain good tomorrow morning, we should see the Nifty bounce back from the top of the trend channel. Going by the Fibonacci retracements too, the Nifty has already retraced 50% of the rise in the last week. Now, whether the Nifty sees this 50% retracement as a good retracement or whether it finds the 61.8% retracement a more reliable support is yet to be seen. 61.8% retracement comes in at 4077.

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Lackluster Day For The Nifty

The Nifty opened flat today with a slight positive bias. All through the day, it maintained a very narrow range of about 40 points. It did move up and down about 2-3 times during the day but all through this range of 40-45 points was maintained. A slight dip in the first fifteen minutes found support near the trendline discussed yesterday (and today). The Nifty, as predicted that it might, reversed from that trendline. But then all through the day it remained lackluster, which is worrying.

Attached above is the 30 minutes chart of the Nifty. Just like yesterday’s chart this also comes attached with the same two trendlines and the 14 period Relative Strength Index (RSI). There are some negatives and some positives to this chart. Let us look at the positives first. First of all, support was found at the lower trendline and it moved up from there. Secondly, the upper trendline was broken through, which again is a positive for the National Stock Exchange (NSE) Index. Thirdly, the RSI is finding support at 40 repeatedly as marked by the brown circle.

But, as I said there are some negatives too. Firstly, the trading throughout the day was dull and boring and even after the breakout above the trendline, there was no enthusiasm which suggests that things may not be all that good for Nifty. Secondly, international cues are not too good. European markets closed more than a percent in the red. Dow Jones, at the time of going into print, is trading about 200 points down while crude is attempting a recovery, though it is not very successful at the moment.

All we can say for tomorrow is that the Nifty seems to have slipped into another trading range, though, a much narrower one, between 4280 and 4380. A move above 4380 should be bullish while a move below 4280 should be bearish in the short term. Long term and intermediate term investors should wait for the pullback to complete before taking the plunge.

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Serial Blasts in Bangalore and Ahmedabad

After five days of excellent gains, the Nifty did cool down a little with two days in the red too. After a loss of 43 points on Thursday, it went on to lose 121 points on Friday. Nifty was trading within a narrow range of 30-40 points till about 1 PM. After that for the next hour or so it staged a good recovery and crossed the highs of the day. But at 2PM came the news that Bangalore was rocked with 7 bomb blasts in a space of 75 minutes which left 1 dead and eight injured. Thankfully, they were all low intensity blasts and were blasted more to create panic than to cause destruction. That news sent the market crashing down and the Nifty finally closed with a loss of 121 points at 4312.

Attached above is the 30 minutes chart of the Nifty with the Relative Strength Index (RSI) at the bottom. Also, on the chart, are an upward sloping trendline and a trend channel between 3800 and 4200. As seen from the chart, the upward sloping trendline is providing support to the prices at 4285. In case this support does not hold, the prices may come further down to the trend channel near 4180-4190. One reason why the prices should find support near the trendline is the RSI. The RSI, as can be seen within the thick brown circle, is finding support near 40. And the RSI finding support near 40 is bullish for the markets, at least in the short term. Three examples of the RSI finding support near 40 have been marked with the green circles and green arrows on this chart itself.

However, things look pretty bad. After 7 blasts in Bangalore on Friday, Ahmedabad was rocked with 16 bomb blasts in a span of 70 minutes leaving 45 dead and 145 injured. Apart from this there was a live bomb found in Bangalore, one in Ahmedabad’s Amraiwadi area and two cars with explosives were found in Surat. The blasts were claimed by a militant outfit calling itself Indian Mujahideen and they even threatened Mukesh Ambani with ‘horrifying memories which you will never forget’. This surely, could bring the markets down. And in case 4285 support is broken, that will then become a resistance. Even if support is found at 4285, there is resistance nearby at the downward sloping trendline near 4340.

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Crude Oil: Where Will It Stop?

Another weekend. Another day of confusion for me to think of what to write about. That is because markets are closed on weekends and I do not do analysis of Friday’s markets till Sunday night. So, Friday/Saturday posts I have to write about general interest to me and all my readers. Of course, I could write about cricket but that is my interest and I’m not too sure whether it is also the interest of my readers and subscribers too. And, moreover, there is nothing to write about cricket on a day when India lost to Sri Lanka by an innings and 239 runs within four days. Hats off to Muttiah Muralitharan who ended with 11 wickets in the match! No wonder he has the highest number of wickets in Test matches. And I do believe him when he says that he will end up with 1000 Test wickets in his career. Anyways, since cricket is not on my blogging list, let us shift to the next most important thing – crude.

In an earlier post, I had written that there were signs visible that crude was showing signs of topping out. And in fact, that day turned out to be very close to the final high made in crude. We all know that crude finally broke down a few days later and is now more than $20 off its highs. People are talking of support near $120, some say $110 and some even say $80. I do not have access to charts of crude traded on NYMEX (New York Mercantile Exchange). Hence, I do the analysis based on the charts formed by prices on MCX (Multi Commodity Exchange). Since MCX is an Indian exchange prices are quoted in Rupees.

Seen above is the daily chart of crude since the beginning of 2008 along with a trendline, a couple of Fibonacci Retracement analysis and the Relative Strength Index (RSI). Let us start with things in chronological order. My previous post on crude talked about the presence of various dojis (a day on which the opening price and the closing price is the same or is very close to each other), which made the charts look a little bearish, even though the prices were increasing every day. Also seen on the charts is a bearish divergence between the prices and the RSI where the prices are increasing while the RSI is falling (as marked by the thick trendlines and the brown arrows). Next, let us come to the trendline. The prices finally broke through the trendline three days after that analysis but soon recovered. The trendline was decisively broken about a week later when the crude prices even went below the most recent pivot low. Not only that, yesterday it has decisively broken through the pivot low formed in end of May. What remains to be seen is whether this can be qualified as an intermediate term downtrend or not. Technically, the breakthrough the most recent pivot low and an uptrend line gives quite a bright possibility that the trend may have reversed. However, it is not confirmed till we have a pattern of lower highs and lower lows visible. While lower lows are seen on the chart, a lower high has not been formed as yet. So, we would have to wait for a pullback and see whether the previous highs are broken through or a lower high will be made. Another post on my blog, which did the Elliott Waves Analysis of crude may suggest that an intermediate term high may have already been made.

Let us now see where support is likely. For this purpose I have used Fibonacci retracements. I have used two retracements starting from the lows marked at A and B till the high marked at C. As seen from the chart and the price action in the last two days, support is being found near the 38.2% Fibonacci retracement level of AC and near the 50% retracement level of BC. One possibility is that the prices may find support at these levels and may reverse, which could happen to be a short term (or who knows, a long term) reversal. If the prices do break through these levels, support may be found near 4865 where two Fibonacci retracements of 50% (of AC) and 61.8% (of BC) converge. Support may even be found there. Of course, it may decide to continue going further down. Where it eventually finds support can only be decided by the crude itself and no amount of analysis can say with certainty where the ultimate support would be found.

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Pullback Starts, Nifty Closes 43 Points in the Red

The Nifty was just waiting for a negative trigger to fall. The Nifty opened about 60 points in the green and then throughout the day kept falling. What was the negative trigger early in the morning? Probably none. It did try to recover at about 11AM but did not succeed. Later in the afternoon European markets also opened weak and then our markets could not recover though it staged a recovery of about 30-40 points before closing. In spite of that recovery the Nifty closed 43 points in the red while the Sensex closed with a loss of 165 points.

Attached above is the daily chart of Nifty with two downward sloping trendlines, a rectangle between 3800 and 4200 and the RSI. The Nifty found resistance exactly at the second trendline (the one on top) as marked on the chart. That was where the resistance was expected. The Relative Strength Index (RSI) as marked in the brown circle shows that the RSI turned from a level of 60. This is not bullish for the markets. It also shows that we may not be completely out of the woods. According to me, the levels of the RSI give a very good indication about the markets. I feel markets are bullish when RSI goes above 60 and bearish below 40 and sideways between 40 and 60.

Okay, a pullback is coming. Where is this pullback going to stop? When do I buy? Frankly, we do not know where the pullback will end. The markets shall decide that. We shall follow the markets and will position ourselves to buy when the pullback is over. We can try and analyse where the support levels are. The first support is near 4310, the second one is the top of the rectangle, i.e. 4200, the third at 4000 and finally at 3800. We don’t know where it will find support but we shall buy when the market rises for two days in a row but only if the low of the pullback is above the previous low of 3800. Keep reading this space everyday and we shall know when the pullback is over and what is the most opportune time to buy.

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Stocks Rally: Am I Missing The Bus?

Stocks in the Indian markets rallied for a fifth day in a row today. And this rally today was to be expected after our government won the trust vote in the parliament yesterday. This was to be expected because the Government's win would mean that the nuclear deal will go through (if the NSG and the AIEA do not object). This was good news for the markets because of which the Nifty opened above 4400 and finally ended the day at a high with a gain of 236 points.

I was out today and have just come back home and it is late at night so I won't go into the analysis of charts today. But before I finish, I would like to add one more thing here. A lot of my readers would be thinking that if the stocks continue to rally like this and this does turn out to be a bull market then, surely, they will miss the bus if they do not 'jump in' now. Well, as mentioned yesterday, I would say that this does not seem to be a bull market because the symptoms are not such. But the market can prove us wrong too. It surely can, but even if this is the beginning of a new bull market, this will also have to go through the customary corrections. And it will give us a lot of opportunity to enter. Today's close means that the market has risen 17.3% in just a matter of five days. And that is a big rise in a bear market and a correction has to come in sooner or later. It is just that we are not getting any negative news to trigger a correction. American markets are flat today, European markets closed with gains between a percent and a half to two percent and the Asian markets were also well in the green earlier this morning. Crude continues its downward journey and is now trading at $124.50.

My point is that new bull markets take time to build up whereas it is generally the bear market rallies which are sharp and give us a sense of hope. My point is that a market which has risen 17% in five days would be quick to fall at the first sign of a negative news. A correction of Fibonacci 61.8% can safely be assumed and if we assume today's high to be the high of this rally then that means a pullback to 4060 is possible. Even if it does not fall to that level, I would be more comfortable buying after the pullback is over than now (even if I have to buy a few points higher than what it is today).

Those who think they will 'miss the bus' need not worry because the markets would definitely see a pullback. One must exercise caution when 'jumping in moving buses' because it can lead to accidents and injury. It is wise to 'jump in' when the 'bus slows down' and I am waiting for just that time.

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Government Wins Vote, Loses Credibility

The Government today won the trust vote. Big deal! They managed to win the trust vote by 19 votes. 275 votes were cast in favor of the government, 256 against and 10 abstentions. While stability in the government was retained, our 'honorable' Members of Parliament made a mockery of themselves and the voting process on live television. Talks of MPs being ‘bought’ were now made public with three MPs claiming to have been bribed to abstain from the vote. The charges, whether true or not, have made us realize what all actually happens in politics (as if we didn't already know). The government, for sure, has won the vote, but lost its credibility, in the eyes of the ‘aam aadmi’ (common man).

The Nifty went up today too making it four consecutive days of ‘decent gains’ in a bear market. The Nifty opened flat in the morning but after news of Omar Abdullah’s National Conference (having 2 MPs) decision to support the UPA government came, the market started going up, solely because the support of those two MPs would have seen the government through the trust vote successfully. Since then the markets have been up only (except a small pullback to 4200) and managed to close on a high too. 80 points above yesterday’s close and 40 points above the top of the range which was at 4200.

Seen above is the tick by tick chart of the Nifty for today from 12:30pm onwards, which was taken from the NSE website. Clearly seen is a bullish head and shoulders pattern formed in the Nifty which has been marked on the chart. The pattern has already been confirmed and gives us a target of 4300 on the Nifty which happens to be 60 points away. Hopefully, that target should easily be achieved on opening tomorrow.

Attached above is the daily chart of Nifty which shows the kind of rally we have seen in the last four days. It has now risen more than 11% in the last four days, has crossed the downward sloping trendline on the daily charts, has moved out of the range and now has managed to close above its most recent pivot high of 4215. Is this a bear market rally or the beginning of a new bull market? Well, it certainly looks like a new bull market but I wouldn’t advise my readers to be too sure about it. My reasons are that new bull markets are born on pessimism and the new bull market rallies would never be as sharp as the one we have just seen. Secondly, a very common phrase in the stock markets is to buy on rumours and sell on news. We have seen the market moving up on hope that the government would win the trust vote. Now that is public knowledge and the smart investor may now be looking to book his profits rather than building a position. Thirdly, a true confirmation of a bull market is when the market is making higher highs and higher lows. As yet, we have just seen a higher high but not a higher low. A correct strategy would be to wait for a pullback and then a rally for two days to see where the new pivot low is formed. If the low formed is above the previous low of 3790 then it may mean that a bull market has started but if the pullback goes lower than 3790 then there may be more pain left.

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No Major Move Till Trust Vote

After two days of gains, we saw another good day today. Politics has become very interesting and Parliament has become a comedy circus with our honourable MPs going back on their words and changing loyalties by the minute. The numbers game and the ‘horse-trading’ continues as the countdown to the trust vote draws closer. At 4pm on Tuesday the members will cast their votes and it will become clear whether the UPA government will fall or will stay. This will become another nail biting finish going down to the wire.

As of now, the UPA has 269 MPs supporting it, 268 against it and 3 are still undecided. If the Opposition gets the support of at least two of these and the UPA gets one then it is going to be a tie and the speaker would have to vote. The speaker, Somnath Chatterjee, being from the Left, it goes without saying where his loyalties stand but to be fair to him, nobody knows who he will vote for in case of a tie, not even the Left. The closest finish so far was when the Vajpayee government lost the no confidence motion in 1999 by a single vote when Jayalalitha led AIADMK withdrew support from the 13 month old government. However, Vajpayee came back to win the elections and even lasted the full term as the leader of a coalition government.

Attached above is the daily chart of the Nifty. As suggested in yesterday’s post, 4165 was supposed to act as the resistance and today’s high turned out to be 4168 before closing at 4159. It is still not possible to determine whether this resistance would be broken or not. If the prices go above 4165 tomorrow, they could go to the top of the range at 4200. A breakthrough above 4200 will also mean that the next target for the Nifty would be 4600. I personally feel that tomorrow is going to be a dull day for the markets in terms of price change. But I do not rule out a volatile session (without any major change in the closing price). I do not expect the Nifty to go above 4200 before the vote is cast. But there may be a lot of participants who would like to close their long positions before close tomorrow, and some may even be willing to go short, to cash in on the opportunity if the government were to lose the trust vote tomorrow. This may take the markets down. The next two days are going to be news driven days and for technical traders it is the best time to go on a holiday since technical analysis does not work on news driven days.

There are no international cues to talk about right now. The European markets were nothing to write home about while the American markets, at the time of posting, were trading flat. Crude was about $2 dearer but that was only to be expected after such a sharp fall was seen in the last two days.

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Nifty Range Widens - 3800 to 4200

Another fantastic day for the Nifty (and for us) on Friday. The opening wasn’t great and it opened flat and remained so for the next three hours or so, before making a run for the tops. The run lasted throughout the rest of the day and in the end managed to close 145 points above Thursday’s close, which itself was 131 points above Wednesday’s, thus gaining 276 points in two days. Before these two days the Nifty had broken out of a range between 3850 and 4200 to go to a low of 3790 and to close at 3816.

Before these two days of gains, we could have said that the 350 points rangebound movement between 3850 and 4200 had been broken towards the downside and that the new target for the Nifty was 3500. Unfortunately Fortunately, that did not happen and we saw these two terrific days which makes us say that the range has only become broader now, broadly between 3800 and 4200 and a breakthrough on any side should give us a 400 points movement.

Seen above is the daily chart of Nifty loaded with the Relative Strength Index (RSI) and a trendline connecting the highs made in mid May and mid June and extended till now. This downward sloping trendline shows that there is resistance for the index near 4165, which will be difficult to cross. In case this resistance is crossed then we have another resistance which is the top of the trading range at 4200. A breakthrough through the 4165 reistance line will indicate that a breakthrough of the trading range may also take place. In case it reverses from 4165 then the inverse is also true that 3800 on the downside may also be broken. A clear uptrend will emerge when the top of the trading range at 4200 is broken through and if the Nifty manages to cross its previous pivot high at 4215.50. Indications of this trading range being broken through on the upside are bright since this is the first time on daily charts that a positive/bullish divergence between the RSI and the prices is seen, as seen from the brown trendlines and green arrows. A positive/bullish divergence occurs when the prices make lower lows while the RSI, or any other oscillator indicator, make higher lows. But a divergence cannot be taken as a confirmation of a reversal in trend. It only gives an indication that a change in trend may take place, whether it happens or not is for the market to decide. After all, there have been events in the past when the weather becomes all cloudy and dark and yet it does not rain.

Whether a low has been made in the short term or there may be more downside is difficult to say at the moment. It all depends on how the government, the opposition, the crude and the rest of the world behaves in the time to come. Any risk to the government will be taken negatively, crude continuing to fall will be taken positively while global sentiment will affect the Indian markets too in the same manner. What actually happens can be decided by the combination of all these factors and there is no point predicting the outcome of all of these situations. In times like these, just follow one simple maxim – “A trend is a friend and should be followed till the end.” And as of now (till the Nifty crosses 4215), the trend remains down.

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