Friday, August 17, 2012

August 17th 2012 Nifty Future Price Action

Nifty Future opened at 5384 just above the previous day close of 5380. In the last hour of trading in the previous day Nifty Future had a break out failure of the 5380 level . The up move in the morning session today was the continuation of the Break out failure of yesterday.  Nifty Future had a notable Tight Trading Range pattern at the Days high for 2 hour duration. Given below is the Nifty Future 5-min chart with observations.

NiftyFutureVolumePlay

1. Nifty Future moves up with large volume moves above the Big Round number i.e. 5400. After a move above 5400 a pullback to 5400 is a valid long entry with stop loss just below it and target as the previous day high of 5410 or the Month high of 5415.

Conclusion: A small scalp trade of 10 to 15 points till the price action plays out

2. New high with moderate volume and a 10 point tight trading range for a two hour duration and with low volumes.  Ideally in a strong up move if there is failure to continue above a crucial level i.e. Big Round Number in Nifty Spot i.e. 5400. Then Nifty Future falls to a strong support, traps Bears and resumes move above 5400. The stop loss for the shorts above 5400 gets triggered and Nifty Future makes new high. But this does not happen and Bulls continuously attempt for new highs without deeper pullbacks.

Conclusion: The Bullish Bias at the start of the day is getting absorbed by low volume selling without deep pullback. Sellers are not pushing prices lower but are dampening the up move attempt

3. Breaks out of the tight trading range with high volume and not able to hold above the top of the trading range (5406 to 5415). Nifty Future falls below the low of the trading range with even higher volume.  Bulls who were long in the trading range and above it start to exit causing a stampede. In this fast and furious down move the levels taken out are

a) Big Round Number i.e. 5400

b) Previous Day Close and day open i.e. 5380-5383

c) Previous Day Low i.e. 5376

Conclusion: In a tight trading range for more than one hour duration when there is a break out failure and price moves beyond the other end of the tight trading range. Then there is a powerful move in the opposite direction as stops gets blown. Due to the long duration of the trading range bulls are already long before the upside break out. Hence traders are not able to add positions after the breakout. Sellers are able to take control and move price to where stops are placed fueling further down move.

4. Fast and Furious down move stopped by very high volume. The down move self feeding loop is broken by very high volume at the major swing position of 5352 in Nifty Future and corresponding 5340 level in Nifty Spot

Conclusion: Bulls are still in the game and halted the down move below major moving averages.

5. From the major swing position of 5352 there is high volume up move till the Day Open and a low volume shallow pullback.  The up move resumption stalls at the Days open with high volume. Nifty Spot and Nifty Future close perfectly at the Day’s Open.

Conclusion: Bears did not look to re test the major swing low of 5352 but also dampened the move above days open.  Yesterdays bearish bias is not completely gone. Bulls are also in the game.

Summary: Today there was the perfect trade of the tight trading range. The steps to identify this setup would be

1) Nifty Future has a bullish up move with high volume that stalls at a major price point.

2) Nifty Future trades in a tight trading range of not more than 10 points for a duration of more than a hour.

3) Sellers are active only at the top of the trading range but do not look to move prices lower at the range low.

4) Breakout above the trading range with high volume fails almost immediately and Nifty Future falls below the lower end of the trading range with high volume

5) The short trade entry at the pullback to the low of the tight trading range is a very high Reward to Risk ratio setup.

This same setup but in a reverse manner is also valid for bullish setup.

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