Have you heard of The Fibonacci retracement?
The Fibonacci retracement is based on the key numbers identified by mathematician Leonardo Fibonacci. In Tech Analysis, the way it works - A major HIGH and LOW on a stock chart is identified and then the vertical distance between high and low is divided based on the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. A horizontal line is drawn at these ratios pullback levels to identify support on pullback.
Let's take the Nifty daily Chart to understand this
- Nifty made a LOW of 6840 on Feb 29 2016 - Budget day
- Nifty made a HIGH of 8968 in the month of September 2016 - Woh Bullish Days 🙂
- Nifty then pulled back but with solid support near 8500/8460: which actually meant a pullback of 23.6% - which is considered as Fibbo Level 1 support or Shallow retracement. All this happened before Nov 08 demonetization announcement
- Nifty crashed below 8460/8500 on SHOCK ANNOUNCEMENT and tumbled to 7900 which coincides with 50% pullback of the whole rally from Feb 2016 lows
- Nifty has managed a decent bounce from 7916.
What does this mean?
Has Nifty made a bottom? Is the 50% pullback a good correction in a Bull market? Frankly, I have no idea. If we go by past experience - Nifty does not bottom like this. It falls to a level - some value buying emerges only to witness strong selling at higher levels. I am more inclined to believe that this pullback/pain might last longer and probably Nifty might find support near 61.8% retracement
Here's why? - Nifty's solid support lies at 200 week ma which is way way down near 7450/7500 as of now
The Chart does not tell you what will happen in the future. The Chart only tells us what's happening right now. Any projection on the chart is based on well-defined trading rules and past experience. We all can guess what will happen but there is no guarantee that it will happen the way we visualize
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