Nifty breaks out after 6 years
Finally, the Nifty index made a new high after 6 years of failed attempts. Generally, when a breakout takes place after a lengthy period of price consolidation, or through a key supply/resistance level, then the breakout trade becomes compelling.
Pullback to the mean
As seen in most of the cases, breakout is typically followed by a pullback. Price tends to retrace back to the original breakout level before resuming its previous uptrend. S&P 500 index after breaking out in May 2013 from 1580 level made a peak of 1687 and retraced back to the breakout point before surging to record levels in 2014. Incidentally, S&P 500 Index also broke out after 13 years of consolidation. Last week, Nifty broke the trendline (previous peaks) resistance and in the process made a new lifetime high. Momentum continues to be strong and the Nifty is in an intermediate uptrend but this vertical rally of almost 500 points cannot sustain for long. A pullback to the breakout point of 6,330 is not ruled out in the near term. However, that dip should be used to make an entry in the index.
Midcaps yet to participate
The CNX Mid-cap index, after years of underperformance, has broken out from an inverted head & shoulders pattern. So with breadth likely to be positive, strength in the index will sustain. Also, we are yet to see a phase of exuberance in the mid-cap index as it trades 20% below its previous peak of 9,782 seen in January 2008.
Nifty target 7,000
Events of the last one month have changed the overall structure of the market. As long as the index sustains above 5,950 levels (lower-end of the previous trading range), the positive bias will prevail. Based on the concept of rounding bottom, range breakout and cup & handle breakout, Nifty can attempt levels of 7,000 and 7,100. However, correction in an uptrending market is always termed as healthy. Whenever the bullish bias or euphoria in the market swings too far in one direction, index always reverts to the mean. So in current scenario, a decline towards 6,330 or a phase of consolidation should be used as a buying opportunity.
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