Weekly outlook of Nifty from March 4th - March 8th

Last week it was explained that “On the chart one can notice an H&S formation with Neckline at around 5800 level suggesting Nifty at critical support line. So, technically speaking one must stay alert if Index breaks this critical support of 5800. Nifty 6000 call has highest open interest suggesting upper boundary for near term.

In fact if Index reaches around this level then it will be a shorting opportunity for NIFTY traders. For the week, watch 5800-5975 consideration to higher end, but not ruling out extended weakness into 5750 for set up of strong post-budget rally.

All together I was expecting some bounce before NIFTY index could crash but it did not happen as the H&S patterns neckline was seen near 5817. In fact Nifty opened the week at 5870 and broke the critical technical support line at 5800 on Tuesday itself. NIFTY fell sharply from high of 5878 into 5672 before closing the week at 5719. The inability to take out 5880 for sharp reversal below 5750-5800 highlights a strong near term bearish momentum.

Sensex broke downwards from a ‘head-and-shoulders’ pattern with the ‘head’ at the upper edge of the upward-sloping channel; the left and right ‘shoulders’ and the  ‘neck line’ formed within the resistance zone between 19000 and 19800.

The damage had the weekly bar drop below the 20 week EMA and the 19000 level. However the height of the ‘head’ above the ‘neck line’ is about 900 points. So, the downward target below the ‘neck line’ should be 900 points. That means a downward target of about 18400, which is slightly below the current level of the 50 week EMA.

Now the question is can the Sensex fall further towards the lower edge of the channel? The possibility can’t be ruled out. However, there is a ‘gap’ between 18000 and 18200 on the daily chart which should provide support in case Sensex falls below 18400.

The daily chart of Nifty clearly shows the break down below the ‘head-and-shoulders’ pattern. The height of the ‘head’ above the ‘neck line’ is about 290 points. The downward target below the ‘neck line’ is also 290 points giving a target of about 5548 below the current level of the 200 day EMA. Despite the highest daily volume on budget day the index didn’t fall below the rising 200 day EMA.

Daily technical indicators are looking bearish and oversold. All four indicators showed negative divergences by touching lower tops while the index rose higher. 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. Well the possibilities can’t be ruled out so keep a close watch on 5550/5520.

Conclusion: 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 for 5550-5565 for extended weakness below 5550 into 5400.