Insights

Nifty: An Update

December 22, 2013 . FundsIndia Desk

We have been getting mails and calls from our clients asking for our view on the Nifty. But, we typically desist putting out updates just for the heck of it. While there is no change in our Nifty stance since our previous update, we wanted to put out this post to address one of the aspects of technical analysis, which is trendlines.  Kindly direct your attention to the chart below.

Nifty trendline

The Nifty has slipped below the blue trendline and has since been trying to scale back above it. Does this breach of the trendline mean a trend reversal? How does one deal with or decipher this trend line and its earlier breach?

We typically are governed by the price action and the other tools such as trendlines, action reaction lines and pitchforks are secondary tools or crutches which aid in trade decision making. We rarely use lagging indicators such as RSI or MACD or the likes.

Given this backdrop, we would not attach too much significance to the breach of the above trendline as the price action is still sporting  a bullish pattern of higher highs and higher lows. Until this sequence is broken, we would not attach much significance to the breach of any trend line.

While trendlines are important, its significance is a function how price has interacted with it on prior occasions. In the above chart, price has done nothing much to suggest that the line is important. Besides, the trendline in the above chart is relatively steep and we tend to ignore such steep lines as price is typically unlikely to maintain that speed of ascent unless in extreme bullish case scenario.

The trendline that we are tracking is highlighted in the chart below.

Nifty terndline2

If you notice, the Nifty has respected and rebounded off this line last week. We would therefore pay a greater weightage to this trendline. While a break of this trendline would make us cautious we would not however abandon the bullish view just because it is breached.

We would rather wait for a price to fall below the prior swing low before concluding a reversal of the recent uptrend. A breach of the trendline mentioned above would make us cautious and tighten our stop loss to protect unrealised gains. We would be alert to the possibility of a potential trend reversal but not press the panic button on a breach of the above trendline.

As long as you are sure of your trade plan and logical stop placement, it does not matter if some trendline is breached. Stick to the plan and avoid mid-course alteration to the plan just because a trend line is breached or an indicator triggers a contra signal. Remember that price has to fluctuate and hence would go through counter-trend moves before the original trend resumes.

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