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B. Krishnakumar

NIFTY (2015.4)

Preferred view: Contrary to the anticipated short-term positive outlook, a bearish trend prevailed in the Nifty during the past week.

The failure to move past the positive trigger level of 2127 and the drop below the negative trigger level of 2070 imparted bearishness. As a result, the index dropped below the projected downside target level of 2025-2035.

The outlook remains bearish. Though there could be a short-term pull back as the index has dropped to extreme oversold levels, a drop to the key support level at 1955-1958 range is the preferred view. This view would be confirmed if the index closes below the immediate support level at the 2004-level.

Fibonacci numbers at play: The recent price pattern in the Nifty showcases the importance of Fibonacci ratios and how they capture key turning points in the market. The price action in the Nifty reflects the basics of the Elliott Wave Analysis and Fibonacci ratios.

The Nifty completed an upward move at 2120.15 on January 4. According to the Elliott Wave theory, any upward move would be followed by a correction, which would be in three legs or segments. The drop from 2120.15 to the low of 1894.4 (January 25) marks the first segment of this corrective phase. This fall would be "Wave A" of the correction in Elliott Wave parlance

The subsequent rally to the recent high of 2183.45 marks the completion of the second segment or "Wave B" as per Elliott terminology. This "Wave B" upward move would be classified as an expanded or irregular "Wave B" in Elliott Wave parlance. The decline from this high would be the third and the last segment of this correction. This correction is likely to be completed at 1955-1958 range.

Elliott Wave theory states that individual wave segments bear a Fibonacci relationship with prior waves of the same degree. The Nifty's price pattern is in confirmation with this principle.

For instance, the magnitude of "Wave B" (from the low of 1894.4 to the high of 2120.15) is 1.272 times the earlier leg of the correction from 2120.15 to 1894.4. The number "1.272" is a derived Fibonacci number, which was actively used by Larry Pesavanto who is popular for his books on Fibonacci numbers and their application in financial market. The significance of this number (1.272) is that it is the square root of 1.618, which is a key Fibonacci number used widely for analytical purposes.

We have seen that "Wave B" has a Fibonacci relationship of 1.272 times "Wave A".

According to Elliott Wave principles, "Wave C" of a correction should also have a relationship with "Wave A". Using this concept we arrive at a potential target zone of 1955-1958 for the Nifty.

"Wave A" had a range of 224.85 points (2120.15 minus 1894.4). If this difference is subtracted from the high of 2183.45, the target works out to 1958.6. From a Fibonacci perspective, the 78.6 per cent retracement of this rally works out to 1956.2. 0.786 is again a square root of 0.618, which is one of the more important Fibonacci number used for analytical purposes.

Given this backdrop, the 1955-1958 range marks a confluence using Elliott Wave Theory and Fibonacci ratios. There is fair chance that the Nifty would seek support in the zone marked by 1956.2 and 1958.6.

The only caveat is that the Nifty is still holding above a crucial Fibonacci support level at 2004.82, which is the 61.8 per cent retracement of the earlier rally from 1894.4 to 2183.45. If this level is not breached, Nifty may reverse direction and resume the long-term upward trend without dropping to 1955-1958 range.

Alternatively, if the 2004 support is broken, a drop to 1955-1958 range would be a distinct possibility. We believe that this level would be broken and the Nifty would hit the confluence zone. We continue to maintain that the Nifty would resume the upward trend and move to the 2250-2300 range.

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