Avoid Nifty this week, Trade other charts!!
Date: 20^th May 2013

Nifty closed at 6187.30 on last Friday to record 5^th straight bull week! Bulls are cheering and brokers are hoping for good time to back!

Wrote last week that Double top should not be questioned during uptrend and double bottom is to be taken. Double top buy signal was generated above 6100 and there is yet to form a double bottom sell signal! I wrote about Bank Nifty out performance to Nifty with the help of P&F Relative Strength Chart. Asked to trade Bank Nifty breakout and Buy on formation of column of X!! Nifty has gone up about 1.31% during last week and Bank Nifty has closed 4.20% up compared to its previous week. This is how P&F relative strength charts can help us. Shown 0.25% chart of Bank Nifty in Figure 4 to observe the Double top buy signal occurred during last week.  

Nifty trend is up with multiple upward count directions and witnessing the series of Double Top buys. Price is going up and a trader should be in the business of reaction than prediction. But affordability is an important factor for a trade to be taken.

I am marking more things in 10 box Point and Figure charts this time for your observations. Have a look at Figure 1 and 2 below.

Figure 1: Nifty 10 x 3 CL Point and Figure Chart

Figure 1 is 10 box P&F chart of closing prices of Nifty. Price is in 45 degree uptrend and as can be seen in the chart above, Double top buy generated at 5590 has not given exit as yet with double bottom sell. Several horizontal and vertical count directions are signaling higher prices and uptrend. Double Top buy signal generated during last week when it crossed the box value of 6100.

 Figure 2: Nifty 10 x 3 HL Point and Figure Chart

Figure 2 shown above is High Low P&F chart of 10 box in Nifty. 45 degree trend is up and recent box is crossing upper Bollinger band which indicates strength in the uptrend. Bear Trap pattern occurred recently has formed mini bottom and made 45 degree internal line trailed up for bulls.

Observe the Band expansion in the chart above. P&F Band expansion indicates price stretch and that the prices are quiet more extended and some consolidation is likely. Beauty of P&F is that it will tell us when to exit longs or look for short. Wait for it to generate double bottom sell signal.

Many have been asking me about Double Bottom Sell signal of P&F. Have a look at Figure 3 to understand why the formation is so important to trade reversals.

  Figure 3: Double Bottom Sell Formation

Double bottom sell signal in P&F chart is generated when column of ‘O’ goes below previous column of ‘O’. I have shown 2 cases in figure 3 that shows the possibility of formation that will generate double bottom sell signal in 10 box closing price chart of Nifty from here.

Case 1 shows about double bottom sell that will be generated in case of vertical fall in prices from here. Case 2 shows that there will be some initial correction which will be retraced back and then price will generate double bottom sell signal. Second possibility is more affordable in terms of risk reward.

Why not to sell at the formation of column of ‘O’ then when we are anticipating reversal? We have seen the benefits of waiting for formation to occur during last weeks. Let price tell us when to trade.

Note that Case 1 will form High Pole formation and I would always go for double bottom sell signal generated after High Pole. They are certainly tradable. This is important piece of information to people who trade P&F charts.  

 Figure 4: Bank Nifty 0.25 x 3 CL Point and Figure Chart

Nifty has marked strong uptrend and First double bottom sell in such a bull market is opportunity to look for long rather than going for short (Shake out pattern).  Increase your bet size if Double top is generated after forming mini bottom from here.

Finally:

Double bottom sell signal from here can be taken due to band expansion but for short term and with aggressive exits. Nifty is in extended up trend and I expect some price consolidation. Let the same happen. If you are long, trail your stops. Else avoid trading Nifty this week and look for opportunities in stocks.

-  Prashant Shah

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