With the Nifty50 index trading close to its all-time high level, it has become a challenging task to predict the road ahead. Election – related uncertainty is adding to volatility. However, various technical theories have helped to identify a possible range. Fibonacci series and price extensions is one way to forecast a trend.
In technical analysis, a Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%
The very well known theory is “Elliot Wave Theory”, developed by Ralph Nelson Elliot, which speaks about Waves (patterns). He exceptionally believed that mass psychology depicts the same recurring patterns in the financial markets. He speaks about waves in 5-3 moves, five moves in an upward direction of the main trend and three moves in the corrective phase.
As per the Elliot Wave Theory, we are in the fifth wave of an immediate trend and the third wave of the Big Bull Run. With the recent development on the Nifty50 charts, the Fibonacci levels indicate major profit booking above 11,950, extending towards 12,500 levels. Now, considering the wave count from the low of a major crash in 2008, i.e 2,252 to the recent highs of 11,760, we can count wave 2, wave 3 and wave 4 respectively. The corrective phase within the wave count includes low of 4,531 in 2011 and 6,825 in 2016. The extension includes 138.20%, 150%, 161.80% and 200%, which give out levels taking wave 2 and wave 3 counts.
The Fibonacci extension of the wave 3 suggest 11,950 to be a pressure level, as the index gets closer to this range, one can expect profit booking or liquidation of high-risk positions. An approximate 1 per cent level, 11850 should see index showing signs of weakness and divergence. The index has already crossed an equivalent range of wave 1, which as per theory, seems one of the targets of wave 5.
When evaluate wave 1 and wave 3, a 50 per cent retracement further add to the high level 9119 giving appropriate relevance to 12,500. In Financial markets, Retracement levels of 61.80%, 50%, and 38.20% possess support and resistance levels in Fibonacci numbers. The extensions further help to identify higher levels.
In case if the index holds 12,500 by staying decisively stronger for over a week, then a next trend may emerge driving index to a greater level of 13,600 – 14,100 levels. CLICK HERE FOR A DETAILED CHART
If Nifty50 witnesses profit booking and selling pressure in the range of 11,850 – 12,500, which seems likely as per chart, then one could see it drifting lower to the range of 9,800 – 9,600 till mid-2020. Investors need to remain cautious now and the volatility will spike ahead of the general elections.