Here's what Nifty has done till date and it gives a good idea on what it might do next -
Nifty established a base at 7540 between August 2014 and January 2016.
Nifty then broke down below 7540 in January 2016.
When an asset breaks down - it does two things - 1. It tests previous support as resistance; and 2. It sells off pretty sharply and does create panic. Post Breakdown - 7540-7600 became the new RESISTANCE
The Breakdown in market and total chaos.
Nifty finally got support at 200 week moving average between Feb 12 and Feb 29.
Here's the weekly chart
Nifty recovered sharply from lows but found stiff resistance at 7540-7600.
Earlier 7540-7600 was the support and hence post breakdown - it became the new resistance.
MOST IMPORTANT LESSON: In Bull market - most of the breakdowns are false and hence one should always be ready to play FALSE BREAKDOWN pattern.
Nifty recovered above 7540-7600 and as it always happens - Nifty created a false Breakdown pattern.
How False Breakdown pattern is played?
Scenario 1: Nifty takes support at 7540
Any pullback to previous SUPPORT becomes a great buying opportunity once it's established that earlier breakdown was false.
The current pullback to 7540 looks like an excellent buying opportunity if we believe the current pattern. Having said that - one should always keep a stop-loss if Nifty slips 1% below 7540
Scenario 2: Nifty takes support at 200 week moving average
What IF Global environment worsens - AND Nifty goes in for deeper pullback. In that case - Nifty can go for double dip support at 200-week moving average which as of today stands at 6972
What will Nifty eventually do - ONLY time will tell. All one can do - is formulate strategy based on the pattern with well-defined stop loss.
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Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers