Weekly Outlook of Nifty from March 11th - March 15th

Last week it was explained that “Despite the highest daily volume on budget day the index didn’t fall below the rising 200 day EMA. NIFTY is very near to its 200 EMA which is at 5650 where one can find a small gap between 5649-5658. So a break below 5650, can we think of filling the gap all the way down till 5400 to fill the gap between 5447-5527. It was also mentioned that Sensex and Nifty have broken down below the ‘head-and-shoulders’ pattern. Nevertheless this is still a bull market correction as both indices are still trading above their long-term moving averages. But short side trading seems better than long side trading in current situation. However nifty is in oversold zone but not showing any signs of recovery till now.
For the week, watch 5550-5650, 5760/5820 with preference into lower end Strategic players can look forward to sell at 5760 and 5820 with tight stop at 5880.”

Index gave an early signal of confirming support at its 200 day EMA at 5650 on Monday and next day opened up with gap and closed the day with Bullish Marubozu candle. It bounced back from the low of 5663 and gave a stunning bounce back of 4% gaining 289 points in the week.

Last week it was observed that the Sensex had broken down below the ‘neck line’ of a H&S pattern, but had received good support from its long term moving average. Head-and-shoulders patterns have measuring implications. The Sensex was expected to drop till 18400 a little below the level of the 200 day EMA.

During last week’s trading, the Sensex started a pullback towards the ‘neck line’ of the H&S pattern. Such pullbacks actually provide selling opportunities but the pullback continued above the ‘neck line’ and negated the reversal pattern. Now what to do for such pattern failure – one should keep a stop at the level of ‘right shoulder’. Now has the Sensex crossed the ‘right shoulder’ the answer is NO. It has just reached near it. So if it crosses and closes above then a further up move can be expected for a new high or else it may drop below the 200 EMA and try to fill the gap.

Nevertheless a drop below the 200 day EMA may be bullish. It will meet the downside target of the H&S pattern and may even fill the ‘gap’ in the chart strengthening the technical health for a stronger up move.

Nifty quickly got out of weakness to a strong rally from 5663 posting a strong weekly close at 5945. The trigger for the rally was from combination of bullish cues from external sector and build-up of RBI’s shift of prioritisation from inflation to growth.

Nifty failed to meet the reversal target of H&S pattern at 5550. Good support from the 200 EMA prevented further fall and helped in breaching the ‘neck line’ of H&S. However the falling volume for the up move raises questions.  The bulls still have to pull above the high at 6111 to maintain a comfort zone.

Conclusion: The index has pulled back after breaking down below the H&S patterns. On Technical chart there is further upside if Index crosses the next resistance at 5972. The target above 5972 is near 6100. The Options data suggests that Index will continue rising further as Option writers are unwinding their positions from Call options and writing Put options heavily. If the index touches new highs, then deeper corrections may follow and if down moves resume, the long-term moving averages may get breached. So stay cautious.