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Inverse Head & Shoulder pattern on weekly charts shows Nifty is headed for 10,000 mark

As you enjoy a long weekend, here is a piece of news that may excite you. A potential Inverse Head & Shoulder formation on the weekly charts of the Nifty50 shows the index may be on course to test the 10,000 mark in 2017.

Before I explain the situation, here are a few caveats. When we will speak about the market on Monday after this long weekend, we will focus more on the immediate previous week that has gone by, the overbought nature of the market on the daily chart and the heightened level of caution required over the coming days.

Here, we are talking about Nifty’s weekly charts of the past three years and the picture we get is amazingly bullish.

We see the formation of a potential Inverse Head & Shoulders Pattern on these charts. An Inverse Head & Shoulders is a reversal pattern, which often occurs after a prolonged spell of decline.

However, it is important to note that in many cases, it also acts as a continuation pattern and this is an outrightly bullish signal.

To treat an Inverted Head & Shoulder pattern as a ‘continuation pattern’, it requires some validation. Usually, if such a pattern occurs after a significant upward move (the way it has occurred on the Nifty weekly charts), it should be nearly 50 per cent size of the previous bounce.

This formation is validated on Nifty’s weekly chart as visual inspection makes it evident that it is roughly of the 50 per cent the size of the previous upward move that occurred on Nifty50 chart from 5,200 to 8,900 level. This makes it as a huge consolidation pattern spanning over two-and-a-half years since the previous runup.

The measuring implication of this formation, i.e. the distance equivalent from the trough of the ‘Head’ to the ‘Neckline’ on the upside, it shows the Nifty is headed to test the 9,900-10,500 levels in the medium to long term. But for this formation to get validated, the Nifty will have to move past the ‘neckline’ drawn in red and continue its upward move in the coming months.

Though the immediate short-term period will be full of range-bound consolidations and minor volatile corrections with heightened caution, if this formation and its measuring implications are read and translated over the medium to long term, the possibility of the Nifty50 testing the 9,900-10,500 levels cannot be ruled out.