Nifty trend for Wednesday

Tuesday’s trading session on D-Street was no less than a Bollywood blockbuster, where the villain (bears) dominated for the majority part of the session. However, in the climax, the hero (bull) found a way to defeat the villain, which resulted in a happy ending! Nifty begun the day with a gap-down and as the selling pressure exaggerated soon after opening, it made a low of 13,447 levels. Once again, the dips were bought and the bulls made a strong comeback as not only they erased its entire loss but also, ended with modest gains. Nifty recovered nearly 120 points from the day’s low to end near the day’s high.

The price action formed a small-bodied bullish candle that resembles an indecisive formation on the daily chart. As the price was near to the close, some may term it as a Doji and as we had a small body, few others may refer it to a hanging man pattern. Similar was the case in the prior session and if we put this into context, it tells us that we have seen the formation of an indecisive candle for the fourth straight day.

Also, if we club the last three trading sessions’ candle formation, we would get a very rare pattern on the chart as in, a ‘tri-star’ pattern. This is not a perfect textbook tri-star pattern but it just resembles it. The occurrence of this pattern is very rare but it should not be ignored. The psychology behind this pattern is that the index has been in an uptrend for a long time. With the trend starting to show weakness, bodies probably are becoming smaller. The first Doji would cause considerable concern. The second Doji would indicate that there was no direction left while the final Doji would put the final nail in the coffin of the trend. Overall, it indicates too much indecision.

Hence, considering the above thesis, Wednesday’s session is going to be an important one to watch out for. Another interesting observation is that since November 26, the price has not closed below the prior bar low and in the last four trading sessions' formation, the long lower shadow indicates the emergence of buying at dips by smart money as the latter is at play and not letting the bears to take over.

Let’s look at what moving averages are indicating. On Tuesday, Nifty took support at 8-EMA and closed above the 5-EMA. As we had mentioned in our earlier note that the 5-EMA has acted like a sheet anchor for the bulls and it continues to act so. Further, Nifty is trading 3 per cent above the 20-DMA. Generally, the price has a tendency to revert to its mean and there are two ways of reverting- one is the correction in the price and the second one is time correction, where the price consolidates and the moving average shifts higher. In the current scenario, we are seeing the second case playing out as the index is witnessing time correction, and the moving average is shifting higher.

Overall, the trend of the index is up, and as long as it trades above the 13,400 mark dips, it would attract buyers while on the upside, the zone of 13,600-13,650 is a strong resistance zone for fresh momentum index, which needs to move above this resistance zone.