The first tenet of technical analysis is that prices move in trends.

And the trend continues in a simple manner when we look at the relative highs and lows of asset prices.

The natural flow of the market is to keep moving in the direction of trend until some reversal signals appear. However, there are some patterns that help us understand whether or not the prices are likely to reverse or not.

And more importantly it gives ‘time’ and ‘price’ wise indications of a likely target range, which could be possible to achieve. The strategy, I am talking about is ‘Wolfe Wave’.

Specifically, I will be discussing about the Rising Channel Strategy on Nifty using the Wolfe Wave Strategy. In this, prices form a Rising Channel pattern as they gradually moving higher. 1.

Prices have to be in an uptrend.

i.e.

Point 3 has to be higher than Point 1.

Point 4 has to be higher than Point 2, and Point 5 should be the higher than Points 1 and 3. 2.

Points 1,2,3,4,5 have to be largely contained within the entire channel band.

There would be some price data points, which can move above or below, but the ‘larger’ price action has to remain within the Channel pattern. 3.

Line 1-2 should be equal to Line 3-4. 4.

Slope of Line 1-2 should be almost similar to that of Line 3-4 5.

Slope of Line 0-1 has to be similar to Line 2-3. 6.

Point 5 should generally go outside or meet exactly at the trendline resistance. 7.

Time interval has to be regular between the waves. The same structure is now getting formed on Nifty on the monthly charts and that’s what makes this pattern all the more interesting. As can be seen in Fig 2, Nifty monthly charts are forming almost a typical Wolfe Wave Rising Channel structure. Setting the TargetsNow, the targets for the structure can be arrived at by connecting Points 1 and 4, and extrapolate that trendline at the same time by drawing a Parallel line of 3-4 from Point 5.

(Something like the one shown in Fig 3.) According to this, we believe that Point 6 is a confluence point of both the trendlines, hence it estimates the likely target price and the time of the estimated target range. Extrapolating the same logic to the Nifty chart reveals the targets as shown below: Key ObservationsIf this wave structure turns out to be true, then the market is bracing themselves for sub-10,000 levels in March-April 2020. Key PointersThe prices are 3 and 5; if they moved higher above the channel, it would tend to be rejected and restricted from going higher, and brought back to the channel limits.The extension of 1 and 4 is generally an indication that the Mean Reversion process occurs on the prices, more as a normalising process, which is assumed to touch (or maybe end) Point 6.The likely trendline of 5-6 has to – I repeat has to –compulsorily break the Channel support trendline.

If it doesn’t and reverses again, the Wolfe Wave strategy could be challenged.Negation of this view would happens if the Channel pattern structure is breached and the index scales higher levels in violation of the rules of the earlier channels (something which happened in September 2010 on Nifty’s weekly charts).Advice1.

Stay cautious and not adventurous in such market conditions. 2.

Use adequate stop losses. 3.

When volatility is high, always reduce your position size. 4.

Hedge your positions appropriately. 5.

Respect the trend, and hence the trendlines. 6.

Corrections are a part of the process in every uptrend.