Last Updated on Sep 20, 2022 by Aradhana Gotur
Kunal is a fund manager at The Streets, a private fund. He has been in the equity market since 2010, performing various roles such as Associate Research Analyst, Research Analyst, and Associate Portfolio Manager. He has media appearances with CNBC and ET NOW. Kunal is also a visiting faculty in multiple colleges.
“Bazaar kya lagta hai” is the talk of the town these days. Nifty is the centre of discussion everywhere, including trains, societies and even family dinners. Certainly, the correction has been healthy. But whether this choppiness is offering any good opportunities for fresh positions? Herein I share my view on Nifty.
Table of Contents
Since 2021, a typical correction correlation is noticed. On weekly charts, Nifty has corrected by approximately 7 weeks and then resumed its journey. One of the corrections took 9 weeks. Rest all were for 7 weeks. The longest time correction is seen on Nifty these weeks where it entered sideways consolidation. But the correction phase remained approximately on the same line. The downside, as of now, seems restricted.
Weekly: Change in polarity
The yellow trendline is offering good support for the time being. The same trendline offered resistance in the past. This is a clear case of “change in polarity”, resistance turning support. Hence, risk-reward for longs is favourable.
Fibonacci ratios are useful in finding support and resistance. From the extreme low of 2020, the rally continued till September – October 2021. Since then, we are witnessing time as well as price correction. This correction is just holding on to the 23.6% zone, which is almost in line with the support trendline discussed in the previous chart.
The trendline support and 23.6% Fibonacci support coincides with hidden RSI bullish divergence where the price is making the same bottom whereas RSI is making a lower bottom. Divergence may continue for more time too, but a good sign to start finding contra bullish trades from present zones.
Ichimoku indicator is a trending indicator. I have discussed this indicator multiple times in the past. In this chart, I am just focusing on the Kumo Cloud of Ichimoku. Kumo Cloud has clearly offered support multiple times since 2017. Recently, the thickness of the clouds has been sizeable, due to a massive rally. The correction phase helped narrow down the difference between price and cloud. Price exactly took the support of Senko Span B of Cloud and bounced. It seems there is a bright possibility of limited downside from the recently made bottom on Nifty.
Daily: Fibonacci Extension
This sideways correction has been a time correction so far. Swings were heavy, but still within broader consolidation. Within consolidation, there has been some relation. The Reverse Fibonacci extension is used. Every downtick had a couple of waves within. The extension of 161.8% has worked 2 times. The third correction halted near the previous low itself, where a 123.6% extension is seen. Bounce from those levels is sizeable, which throws a ray of hope of support well taken and a counter-rally is commenced.
MACD is a lagging indicator, which confirms the trend. The crossover of MACD offers early entry into the trade. We can see that MACD Crossover is confirmed on the chart, which offers the early confirmation of limited downside. Also, the crossover is just in the same zone as the earlier crossover, which is adding more conviction of reversal.
On the daily chart, 400 period’s Exponential Moving Average is applied. As the moving average is based on trial and error, 400 period is selected based on historical support proofs. It is clearly seen that 400 Period EMA has offered support multiple times in the past. The most recent bottom of the Nifty has also taken support of the same average.
Putting it all together
After looking at the weekly correction cycle of 7 periods, change in polarity of trendline alongside 23.6% Fibonacci retracement, hidden RSI divergence, Ichimoku Kumo Cloud support, and Daily timeframe extension within sideways consolidation, MACD Crossover from extreme lows and 400 period EMA support, I feel the downside is very limited from the present zone. One should look at bullish entry opportunities with an extremely favourable risk-reward ratio.
Statutory Disclosure: Kindly note that this update is only for educational purposes. It is safe to assume that my personal position, my fund’s position, my client’s position and my relative’s position may be open at the counter. Prefer to take the advice of your financial advisor before initiating any position.
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