?Nifty may challenge all time high, 1000 point advance possible

The Nifty seems likely to challenge its all time high based on a bullish chart pattern it formed after last week’s price action. If the all time high is cleared we can see the bullish trend continue to nearly a 1000 point rally.

The bullish chart pattern is called a cup and handle and it is more clear on the Nifty than the Sensex.

Let us take a look at the NIFTY chart.The cup and handle are outlined in white.

Now a cup and handle formation though a high probability bullish set up is no guarantee that the index will rally. There are a few resistance levels that have to be cleared before skies clear for the bulls.

Resistance levels are areas, where supply exceeds demand leading to a drop in price and support areas are where demand exceeds supply leading to a rally in price.

Now let us understand the cup and handle pattern which is a bullish pattern, which has a consolidation before the breakout. This is essentially a continuation pattern meaning that if stocks are rallying into the pattern, it will rally after a break out of the pattern.

In the pattern the cup happens when prices fall substantially, bottom out and then rally again. When prices reach around the origin of the fall, there is another smaller drop and a rally back up to the origin of the fall. This forms the handle.

The pattern is considered bullish as the handle shows the inability of sellers to drop prices down to the bottom of the cup. It indicates that the buyers have gained control and that a breakout is imminent. A breakout with a strong increase in volume shows that the pattern is working.

Once the breakout occurs the projected rally is estimated by measuring the distance from the right peak of the cup to the bottom of the cup. In the case of the Nifty the projected rally is around 1025 points.

The fundamentals too seem to be supporting a potential rally. Firstly, there is some easing by the Reserve Bank of India. In the US the debt ceiling debate seems to be head to a resolution.

The US President Barack Obama finally nominated Janet Yellen to head the Federal Reserve after Ben Bernanke leaves. Yellen is considered very dovish on monetary policy and likely to continue running the money printing presses or so the market thinks. These factors are expected to keep the markets bullish for sometime.

However, the Nifty does face some road blocks before it can be off to the races. The index is right now in a resistance zone as shown by the red lines and prices often fall from resistance.

There is also a bearish hanging man candle stick pattern which is bearish. In a hanging man, the candle has a small body at the top and long tail. Also prices gapped into the resistance. Markets generally tend to retreat a bit when gapping into resistance.

Agap happens when prices close at one level as it did on Thursday with the Nifty and than open much higher the next day as it happened on Friday with the Nifty. It is possible that the market may consolidate a bit before the breakout.

The resistance levels that the Nifty has to clear are 6130 and 6225 before heading to the all time high around 6350. If that level is cleared we could see the index heading to 7130. Remember to keep and eye on the Sensex too as the 30-share index has to clear its resistance levels too.