Wednesday, August 24, 2011

About Nifty Fibonacci retracement levels

During the previous bear market in 2008, I had written a post: ‘How low can the Sensex go?’, where the concept of Fibonacci retracement levels was introduced. Now that the Indian stock market has entered a bear phase once more, it may be a good time to revisit Fibonacci levels to get an idea of how low the Nifty may fall.

The assumption here is that the entire bull rally – from the closing low of 2573 on Mar 9 ‘09 to the closing high of 6312 on Nov 5 ‘10 – is being ‘corrected’. The Nifty had an up move of (6312 – 2573 =) 3739 points, which can be rounded-off to 3740 points.

The respective Fibonacci retracements are:

  1. 38.2% of 3740 = 1428 points
  2. 50% of 3740    = 1870 points
  3. 61.8% of 3740 = 2311 points

So, the retracement levels are:

  1. 6312 – 1428 = 4884; say, 4900
  2. 6312 – 1870 = 4442; say, 4450
  3. 6312 – 2311 = 4001; say, 4000

These levels have been marked on the Nifty closing chart below:


How sacrosanct are these Fibonacci retracement levels? No level is sacrosanct where the market is concerned. It can go anywhere and stop anywhere. But after studying hundreds of charts over many many years, the gurus of technical analysis discovered that markets tend to turn around near Fibonacci retracement levels – both in bull and bear markets.

So, how far down will the Nifty go? The 38.2% retracement level is where we are at now. Can it bounce up from here? Looking at the state of the global and Indian economies, and the weakness in the Nifty technical indicators, the answer is ‘no’.

The next likely support is near the 50% retracement level of about 4450. If that is broken, then the Nifty may go down to the 61.8% retracement level of 4000. Interestingly, 4000 is not only the downward target from the break out below the large descending triangle on the Nifty chart, it is also the top of the huge gap formed on the chart in May ‘09 (not visible in the closing chart). Such ‘coincidences’ make technical analysis a lot of fun.

Can the Nifty fall below 4000 to close the gap? Very unlikely, but not impossible. In Oct ‘08, the Sensex dropped to 7700, which was well below the 61.8% retracement level of 9900. What is the likely level where the Nifty may find support?

Note that the Fibonacci retracement levels are just some numbers calculated on the basis of empirical observations. More realistic support levels are at or near previous tops. The Jun ‘09 and Aug ‘09 tops occurred near 4700. The top on May 18 ‘09 was 4323 and that on Jul 3 ‘09 was 4424 (very close to the 50% retracement level). So, we can expect the Nifty to turn around from the zone between 4300 and 4700.

What should small investors do? Avoid buying or selling in a panic. If you didn’t book profit at 6300 or 5900, don’t start selling now. If you are planning to invest in an index fund or Nifty BeES, start accumulating below 4700. As far as individual stocks are concerned, carry out this same exercise on their respective charts to decide on entry points.


Vats said...

Thank you Sir. Very Crisp & Clear In terms of numbers. Will keep track of the levels.

Anupama said...

TA is fun;-)

Subhankar said...

@Vats: Appreciate the feedback.

@Anupama: Anything can be fun - if you enjoy doing it!

navjot said...

grt work sir...

Subhankar said...

Thanks, Navjot.

Looks like we are nearing levels written about three months back!

Unknown said...

What will be the new levels to watch for Nifty with respect to Fibonacci Retracement?

Subhankar said...

It is better to look at Fibonacci retracement levels after a trend change (from bull to bear, or from bear to bull).

How will you know the trend has changed? Technically, the confirmation comes when the 50 day EMA crosses below (and remains below) or crosses above (and remains above) the 200 day EMA.

It is even better to look at the charts of individual stocks instead of worrying about index levels (unless you are thinking of investing in Nifty BeES).