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Nifty Post Mauritius Treaty Change Analysis

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Nifty opened Gap down Post the Mauritius Treaty Change. While some may find reasons to believe that this is not good development for the stock market, the fact remains from a long term perspective all attempts at cracking down on tax loopholes or crony capitalism are very positive developments for the economy. So even if the markets were to crash sustain-ably, it should not be attributed to this specific development.

Coming back to the stock markets. It would have been a specially difficult session for intraday trading, likely because more than 80% of the stock had the same price action at the open: A sharp open lower and equally sharp initial pull back, leaving the market in middle of nowhere without a trend. Below is the 5-min chart:

Nifty

The chart shows a clear volume spike at open almost 3-4 times the average, this volume spike in response to a news event, makes this level of 7781 a key level for Nifty from short term perspective. But the price action post the bounce from this level looks corrective in nature. Lets look at the 60-min chart of Nifty:

Nifty

The fall from close to 8000 levels is depicted with three labels:

The A-swing move

The B-Corrective move

The C-swing move.

These three labels combined formed a corrective move that ended around 7679. Also the C-leg was 1.21 times the A-leg. Post this correction we saw a sharp rally up to 7896 in 3 days, post which we had today’s whipsaw price action. Interestingly this whipsaw action was contained in the same region as the B-correction move. This correction zone is broadly 7781 & 7892. Unfortunately the whipsaw action has not evolved as a clear 5-wave impulsive move. The gap area formed (and subsequently filled) doesn’t add much to our analysis. On the contrary it seems better to classify each leg of today’s move as corrective in nature, this should also mean that we may spend a bit more time within this correction zone before we try to break away from it. As of now two possibilities are high on our list. Both these scenarios should ultimately mean that the prices break to the upside after the corrective price action, the only difference would be in potential upside :

Scenario A: We immediately try a test of 7781 to the downside and bounce back perhaps after breaking through it briefly. This kind of a development would be an extremely bullish and we should anticipate a sustainable break of 7992.

Scenario B: We develop more legs within the gap area resulting into a triangle pattern that is contained within the correction zone of 7781 & 7892, with a breakout to the upside. This may also result in a break of 7992 to the upside. However it is not likely to be sustainable even if it breaks the key level of 8000. This would be so because this entire upside movement from 7679 levels would become part of a probable B-leg of a Flat correction (We may elaborate on this if  such a development takes place.)

Bottom Line: Nifty may consolidate a bit more within the Correction Zone of 7781-7892. Formation of a triangle pattern within this correction would mean that the next leg of the rally over the recent highs of 7992 level may not be sustainable (on this attempt) and we may end up reversing the gains. In absence of a triangle formation we may expect sustainable gains for the index.

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