Nifty correction wasn’t able to break the crucial level of 7896, and has since managed to break above the crucial 8300 level. Chart Below:
This move is likely a wave (v) move as part of wave 3 or C. As readers would recall we had mentioned in one our of our previous articles that in order for us to rule out our alternate bearish count we will need this rally to break the 8655 level on the upside. This would ultimately tell us if we are in a wave 3 impulse move (which would mean higher levels ahead in the medium term) or if we are in a wave C (which would imply a major fall in the market that may lead to Nifty losing most of the gains since February/March ’16). Also so far the amplitude of wave 3 (or C) has not even achieved equality to the amplitude of wave 1 or B. The measured target for wave 3 or C is around 8430. If this is wave 3 then it should actually head much higher and should easily be able to break 8655 level. But currently we are already seeing five waves developing as part of wave 3 or C. If we are indeed in a wave 3 this implies we would need to develop extended waves to make sure we break the crucial 8655 level, which would mean after wave (v) completes we may have a correction followed by further rally. Unless we cross 8655 to the upside we can not be sure we are in a wave 3 impulse move.
But, the price action just around brexit vote outcome meant that the wave (iii) of 3 (or C) ended in a probable truncation. This is not usual behavior of a wave 3 rally. This has increased the odds that our alternate bearish count may come into picture and we may instead be in a wave C. We also have measured targets based on subwaves of wave 3 (or C). Chart below:
As per these subwaves the measured target comes around 8423/8535. If this rally from Feb/ March lows is indeed an A-B-C correction (of an X wave) we should expect the rally to end in this region. Also if this is an X wave, we can expect a substantial decline that could potentially reverse all of the gains we have seen so far since Feb/ March.
Since multiple calculations are shouting 8420-8430 as an important target for Nifty, we can expect a correction to develop around this area. If the market breaks through this it may extend the rally to 8535. But looking at how quickly markets have moved up without any substantial correction, one should be extremely cautious as the downside move may also be rapid and sudden. We think it would be prudent to perform hedging activity in this zone of 8400-8500. Also partial profit booking, weeding out under performers would be prudent.
Conclusion: We need to see a break of 8655 in Nifty to confirm we are in a wave 3 and not wave C. 8420-8430 has the potential to be an important zone from which a correction may begin. The nature of the correction and extent of subsequent decline may also help us determine the further extent of correction.