In my previous post on Nifty, I had mentioned that 11325 is an immediate support to keep an eye on, as sustainability below it would expose the index to decline towards its important intermediate support of 11111. Yesterday, price fell to as low as 11185, before recovering from there. For now, the good news is that the index has not broken the key support of 11111, indicating that the uptrend still remains intact.
Meanwhile, in my previous post, I had also mentioned that if price shows signs of bottoming out around last week's low of 11303, a hidden bullish divergence could start to play out. What is a hidden bullish divergence. A hidden bullish divergence is a set up wherein the RSI makes a new low, but price does not make a new low. It is not appear as frequently as a normal bullish divergence does, but it often tends to be powerful.
In the chart above, notice the two lines marked on price and RSI. See that price has made a higher low, while RSI has made a lower low. I have also marked three points in RSI, labeled A, B, and C, and the corresponding points in price as well. A reflects the date when the RSI made the first of the two lows (3rd August) and C reflects the date when the RSI made the second of the two lows (9 September). Meanwhile, B reflects the highest point in the RSI (28 August) in between the two points A and B. The corresponding points have also been marked on price.
Why have I marked these points? Well, in order to calculate price targets. Yes, you can calculate price targets whenever you spot a bullish or bearish hidden divergence (this price calculation technique was developed by Andrew Cardwell). Let us now see how we can calculate price target for Nifty using the hidden bullish divergence that just formed. Keep in mind that price targets are calculated on the basis of closing price only. The highs and lows are not taken into consideration.
Now, let us identify the price close for each of the three labels - A, B, and C
- A - 3rd August - Nifty close is 10891
- B - 28 August - Nifty close is11647
- C - 9 September - Nifty close is 11278
To calculate the price target, we need to find the difference in price between A and C. This difference happens to be 387pts (11278 - 10891) This 387pts is then added to the price at B, which is 11647. This gives us a price target of 12034.
So the price target of Nifty going forward is 12034.
But what about the risk? What if the pattern does not work out as expected. In that case, where to place to stop loss. Well, one way to keep a stop loss is below the price low that formed at Pt C. This happens to be 11185. An alternative stop loss would be below the key intermediate low of 11111.
Please note that the above concept is for educational purpose only. You could learn about hidden bullish and bearish divergence by clicking on the School of Stocks link here.