Nifty Futures' 5940 Support Broken At Last ?
Last Thursday, Nifty futures pierced the almost two month old support at 5940 by some 15 points and rallied 120 points. Since the bounce was from a major support it was expected that it may extend to some more time, even though the resumption of the downtrend was not all ruled out. As such it was indicated that Nifty futures may test at least the immediate resistance at 6080 - 6090 levels. However this expectation was belied by the market action on Friday. Now, let's examine this episode for any key takeaways or lessons. The first point to be considered is that it is always better to trade in the direction of the dominant trend which at this time is downward. The second lesson is that even if we enter in to a counter trend trade, it should be managed with very tight stop losses and any profit should be protected either by part booking or by hedging. The third lesson is that only the most nimble traders should enter in to a counter trend trade and the position limit should either be lower or to be reduced after entering in to the trade. The fourth general lesson is that all supports and resistances will break after being utilised or misutilised many times.
The so called subtle gaps ( so called because this author is not aware of any other name for the said incident in the technical analysis literature ) have been explained on various posts on this blog. At the cost of repetition, here is the explanation once more ! Generally speaking, major indices like Nifty, Sensex and it's derivatives like Nifty futures reaches the last traded price or/and the adjusted closing price of a day on the following day. Now if the last traded price or the closing price is not reached on the following day, it leaves a so called subtle gap. These subtle gaps are not very common in the Indian context. Experience shows that such subtle gaps occurring at or near the rally highs have indicated imminent weakness and corrections.
Nifty Futures - Daily Chart
