The week on Indian stock markets (National Stock Exchange (NSE) and BSE) was monumental in that the benchmark indices SENSEX and NIFTY50 reached their respective lifetime highs and that too of a significant psychological level. Even though, the indices pulled back about 1.5% the next day, still the Friday action was confidence-inspiring.
The investors and traders must be happy and probably sitting on big profits or may have realised their profits by the closing on Friday January 22, 2021.
In this week-end analysis of the Indian benchmark indices, however, technical analysis indicates a weakening in prices if not a top being formed over a period of a few months.
What leads this author to such a conclusion? Now, we will explore the rationale (with charts) behind a bearish outlook on SENSEX and NIFTY for the coming months.
Inverted Hammer is a candlestick pattern that usually indicates a top being formed. This candlestick pattern has a few requirements and the weekly chart of NIFTY 50 (chart image attached below) has formed two consecutive Inverted Hammer candles.
Next, however, the prices are in a firm uptrend channel. Technical analysis-wise unless the low of an uptrend channel is broken, the upmove is considered safe. See chart image below.
Now we are in a position to form estimates and trading plans for the coming months for investments and trades of different time-length. The following discussion is with reference to the following chart image.
For traders, a shorting opportunity presents itself. Here, the author recommends exiting near the bottom of the uptrend channel, and a stop above the highest high of the last two weeks candles. Entry for the short trade is recommended when the price breaks 14,220 to the downside with target at 13050, and the stop is recommended at 14835.
Based on the same line of reasoning, for longer-term traders and investors who are already long, further adds to their position may be made near the bottom of the uptrend channel.
For traders who prefer momentum trades i.e. breakouts, long positions may be entered as shown in the chart image below. Since this will a Trend Following trade, the traders and investors in this trade will be entering at the first price above the highest high of the two Inverted Hammer candles i.e. when the price of one tick above 14,800 i.e. 14,800.05 is made on the exchange. The stop will be the lowest low of the two candles i.e. 14200. Once the trade is on, a trailing stop while allowing for sufficient price range for the index to fluctuate may be utilised.
Finally, it goes without saying that any individual or entity that participates in capital markets does so at their own risk, and this author, or this website, or any other individual or entity cannot be held liable as all this information is for education purposes only.