Caution for Small Cap traders

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Daily Chart

Nifty Small Cap index  which is the average of 100 stocks have rallied from February 2016 till date. Many analysts are still very bullish for this index and are betting big. Looking at the daily charts many are missing small details which is shown in the chart.

From the above chart, looking at the pattern one can clearly make out that the index is forming a distribution pattern. A classical wedge pattern can be seen which is also known as ending diagonal. The post impact of the wedge pattern is devastating and small caps are favorites for short selling after dramatic rise.

Through wave perspective, the benchmark is forming an ending diagonal pattern which is a bearish sign. On the smaller time frame, prices are still in the last leg of pattern that is wave v (five). From here 100-200 points rally can be seen which would terminate the pattern and eventually it will reverse (as forecasted in the above chart). Momentum indicator RSI has already exhibited negative divergence which indicates loss of positive momentum.

In short, be cautiously positive for this index as it is expected to slide in near future and will also break the support of ii-iv line shown above.


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