Short term bottom on NIFTY

Testing of support and confirmed rejection of lows is good news for bulls on the NIFTY. What is in store for the next session? Some of the points to note: MACD Histogram on the daily chart has retraced bullish divergence, the same on the intraday charts, at the lowest low price on the index, a shallow bottom on the histogram was formed and the closing bar has a strong histogram above zero. There is a multiple bullish divergence on the intraday MACD histogram.

Daily charts saw a test of support on Friday, while most of the Global indices showed renewed weakness, our index brushed off the same with just an opening low. The opening low was rejected by the market, which shows clearly on the chart formation with a long spike to the bottom and a close above the opening price. All these signals give us an alarm that something is brewing on the bullish side.

As we write on a regular basis that any move cannot be one sided, 'a ball thrown up will at some point turn and return to base'. The same way markets are always connected to their value zone, as my mentor would always say, 'markets are connected to an hour long rubber band, it will snap back to value after extending between trends'. The rejection of lows on the Friday session shows that a significant turnaround is around the corner for NIFTY. A close above opening adds more strength to the bullishness.

All these bullishness holds good for the hourly charts only. Now, what is the potential for the move up? The value zone for Friday's closing on NIFTY is 5062-5122 levels, showing that the price move can reach anywhere between the sweet zone levels. We can find a resistance at 5100 levels, so it would be logical to assume that any bullish move could have the potential to reach 5100 levels.

Where to buy? There are many theories on the entry techniques, few traders use the bullish divergence of histogram and it's ticking up as confirmation to the end of the prevailing trend and cover shorts to go long, but this gives more whipsaw trades (at least that was our experience). So, we need some confirmation and that was not visible up to the closing bar on Friday. A close above 4960 on the first bar of Monday will give that confirmation, but the price on Monday's first bar is sure to exceed that value by many times. Let us wait for the charts to form and then decide on the course of action to be taken there.

Global market consensus, yes, it has painted a different picture. European markets have closed marginally weak following a thrashing they received on Thursday, but the US markets have shown robust strength and have closed positive by more than 1.5% on their Index values. This is another important clue that our market is going to open strong on Monday.

So much for the Hourly charts, now what is in the daily? Daily chart is trending into the new bear move. While MACD histogram has retraced bullish divergence, MACD lines are strongly trending down giving a multi month low below zero. Shorting here is a Greater fool's theory, it says that "I am a fool, I am selling below value, but I hope to meet a greater fool down the road who will be willing to sell to me even lower". Hence, this is not the right place to enter short, those who are not already in short trades, shall wait for the market to return to value and then evaluate a correct level to short, which suits their risk/reward appetite. At present, the market is in the rallying mood, so a wait till it forms a minor top, patience will reward in a rich way.

Weekly charts have closed below their slow moving average; a breach of 4842 will turn the weekly charts into a bearish trend. What is the strength for bearishness on the weekly? Again it is very strong with a multiple bearish divergence on all indicators; the last high made by NIFTY on the 2^nd week of April was backed by a very lackluster bullish power, which is shown by the MACD Histogram struggling to keep its head above zero line. And that was the end of bullishness on the Index.

All these thoughts written here are probabilities; markets can be totally against all views expressed. We have made our analysis based on previous occurrences. It has been proved for a century, that human psychology is a repetition always. Traders please use your own judgment before committing real money. We believe these inputs would add stream to your analysis as a starter.

Happy trading folks.