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Nifty P&F Analysis Nifty P&F analysis Medium term P&F chart of Nifty has turned to sideways and indicate broader price consolidation Nifty 10 x 3 (Short-term) Point & Figure chart has witnessed bearish breakout below 8170 as shown in the chart. With triangle breakout, price has formed Mini-top at 8260. Current formation is bearish and below 45 degree trend line. Bearish counts triggered after forming Mini-top are closed (achieved) as shown in the chart. Trend is down, but 1% x 3 breadth indicator of Nifty 50 universe has gone below 20% that indicates exhaustion which is typically followed by price or time correction. Hence Risk reward is not in favour of fresh positional bearish trades unless breadth moves in to neutral zone. Exactly opposite was the scenario when we published our last newsletter, fresh bullish trades were not looking affordable then. We comment on daily basis on trading strategy that one should follow based on P&F trend and breadth analysis at www.definedge.com Bank Nifty P&F analysis Bank Nifty 0.25% x 3 P&F chart has triggered multi-column breakdown formation as shown in the chart Chart pattern has turned bearish and price is trading below 45 degree trend line Bearish counts are open in the chart that can be referred till price maintains the bearish Mini-top price level which is placed at 18670. Relative strength P&F chart of Bank Nifty to Nifty has formed bearish follow-through formation that shows that sector has been one of the underperformers to Nifty index Look for next formation when breadth is supportive Multi-column breakdown pattern and ratio studies applied are explained elsewhere in this newsletter Sector Relative Strength analysis P&F Relative strength charts plot ratio line of two instruments as Point & Figure. Price of numerator is out-performing denominator if ratio line is rising. Conversely, it is under-performing denominator if ratio line is falling. P&F formations help i idetifyig ad sorig the setors ad it’s ostitutes ased o the RS sore atrix. Read here to understand the methodology of scoring a chart based on P&F formation of last three columns. Below are the tables showing current performance of sectors based on Relative strength matrix score analysis. Nifty-500 Index: P&F Multi-column breakout list Below is the list of stocks from Nifty-500 stock group where Triple top bullish formation is active on higher box value (3% x 3 Point & Figure chart). Pattern is considered as active unless basic sell signal is generated in the chart. P&F Triple top - Triple bottom patterns We discussed basic P&F formations during our previous newsletter. Bullish Triple top and Bearish Triple bottom are important P&F patterns that shows breakout from strong resistance or support. Triple top buy is a bullish multi-column formation where a column of X has gone up above previous two columns of X that happened to be at similar level. Similarly, Triple bottom sell is a bearish formation where a column of O has gone below previous two columns of O which were at similar level. Hence it becomes strict five column formation. In case of triple top buy, earlier columns of X at similar levels showed strong resistance because price reversed from there at least by 3 boxes to generate column reversal formation (note - not only time correction). Price overcoming that supply zone is a significant information displayed by Triple top signal. Same way, two columns of O happened to be at similar level shows support which when gets broken by consecutive column is important breakdown pattern shown by Triple bottom sell formation. Below is an example of Triple Top and Triple bottom formations on a P&F chart. It is a rare formation which can be scanned among the group of stocks. Below are the current chart examples showing Triple top and Triple bottom formation on 0.25% x 3 P&F charts of derivative category stocks. It is a useful formation across timeframe and box-values but have got specific importance when found on higher box value charts. In our newsletters, we have dedicated a section that provides list of stocks from Nifty-500 group where Triple top signals that are active on the charts. (Active mean basic reversal signal has not come since multi-column pattern breakout). Read more about their advantages on higher box values. Ratio chart If we divide the price of one instrument with that of another, we get ratio of their prices. For example, if Bank Nifty is trading at 18000 and Nifty at 8000, we get the ratio of 2.25 if we divide the price of former by latter. Bank nifty is a numerator in this case and Nifty is denominator. It is the ratio of one price to another for that particular period. This way, if we derive the ratio of two instruments on daily basis, we can plot the daily ratio chart by connecting them. It will look similar to usual line chart plotted by connecting two prices. Refer daily ratio chart of Bank nifty to Nifty shown below. The ratio line shown in the chart can be analysed and we can apply different techniques of analysis on the ratio charts as well. But think of it.. what does rising ratio mean? For ratio line to go up, numerator instrument will have to produce stronger number than denominator instrument. Hence rising ratio line indicates that numerator is outperforming denominator and falling ratio line suggests that it is underperforming denominator. Note that outperformance doesn't necessarily mean that numerator is rising when denominator is falling. It is outperformance when former is rising more than latter or falling less than it. So when ratio line in the chart shown above is rising, it shows that price of Bank nifty is outperforming that of Nifty. This can become significant information and we can utilise it in different ways. Below are the major ways to take benefit of ratio charts. 1 - Pair trading 2 - Strength analysis - Sectoral analysis 3- Intermarket analysis Pair trading is popular market-neutral trading strategy among traders where both the instruments are traded simultaneously. For example, when ratio line rises, numerator can be bought and denominator can be sold. People use mean reversion techniques on Ratio charts. Sectoral analysis can be performed on Ratio charts by analysing ratio charts of different sectors against Nifty (broader market index). Above chart shows channelling and trend line analysis on ratio charts. Ratio chart of Bank Nifty has remained in rising channel line for long time showing the better performance of Bank Nifty index. Nifty IT ratio line chart has broken bearish trend line and seems to have broken out from bottoming formation. Intermarket analysis is part of Technical analysis which examines correlation between major asset classes such as stocks, bonds, commodities and currencies. John Murphy has explained it in detail in his classic book on Intermarket analysis. Knowing the relationships between these asset classes can help the investor to determine the stage of investing cycle. Read more http://www.definedge.com/how-to- find-stocks-to-trade-relative-strength- analysis/ Doji candlestick chart pattern As Steve Nison explains in his popular books on candlestick charts, Doji is a candlestick formation that shows indecision among market participants. Perfect doji is defined as a candlestick formation where opening and closing prices are same. However, some flexibility is applied to this rule, they should be nearly the same. There are different types of doji defined as per the appearance of open and close on a candle. Gravestone doji gets developed when opening and closing prices are at the low of the candle. The name represents the graves of those bulls or bears who have died defending their territory. Longer the upper shadow, the more bearish the implications of gravestone doji. Similarly, when they are at the high of the day, it is known as butterfly doji. If the opening and closing prices are in the center of the session's range, the pattern is referred as a rikshaw man doji. The doji formation with long upper and lower shadows is known as long-legged doji. Doji is a useful formation to analyse congestion. Gravestone doji in uptrend and Butterfly doji in downtrend are specific versions of Shooting star and Hammer candlestick patterns respectively. Doji need more confirmation to indicate bottom than they do at top. Look left in the chart for doji, they can can act as important reference points. Resistance (supply zone) or Support (Demand zone) can be analysed further in the price area where multiple dojis have appeared before. While opening of the next candle can be a part of the strategy to trade these formations, NR4 and NR7 discussed during the last newsletter can become important combination. Doji when the candle is also narrowest among last four or seven candle, suggest price squeeze or strong congestion. Below are the examples of current weekly candlestick charts showing Doji along with NR7 formation. Breakout after such types of formations becomes useful information. Next newsletter will talk about wide range formations. Line Break Charts Three line break charts originated in Japan during 19th century and it was first brought to the other side of world by Steven Nison when he published the book, Beyond Candlesticks. Line Break charts ignore time and volume which is similar to one aspect of Point & Figure, Kagi and Renko charts. These time independent charts plot only price and only when it moves as per certain criteria. This kind of method of plotting eliminates noise to a larger extent and produce easily readable patterns.
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