The NEPSE index had been creating new highs until a month ago. Then, from February 21, the index began to lose. It had been losing ever since until today.
This correction was highly expected by investors. The stock market had become overinflated for myriad reasons. Even in a bull market, a stock can’t keep gaining at all times. A bull market is characterized by explicit upswings and minor corrections. Thus, corrections can actually be a good entry signal in a bull market. Last year’s trend indicates that we are already on a bull trend.
It is seen that the index has lost for nearly a month now. This is the average period of a correction of about 10%. Coincidentally, the index has also lost around 10% from its most recent high (which is also the all-time high.)
Yesterday’s candlestick was particularly interesting. The open and close were near each other, and there were long shadows on both sides. All this confirms the formation of a Doji candlestick. A Doji forming on a correction indicated that the bearish sentiment was weakening.
This was further confirmed by the formation of a green (bullish) candle today. Furthermore, the last three candles roughly look like a Morning Star candlestick pattern, which is a strong bullish reversal pattern.
Support and Resistance
This is the third time the index has bounced up from the support zone at 2,360 – 2,370 levels. The more times an index or a stock price tests support/ resistance level and bounces back, the stronger these levels become.
RSI and MACD
The RSI is currently at 46.34, which is pretty normal. Compare this to the time a few weeks ago when NEPSE was overbought and seriously hyperinflated. The RSI was pushing way above the 70 level, which is considered the overbought zone.
With a correction in the last month, it is seen that the overall market has calmed down and come back to its senses. Both overbought and oversold regions are critical times for a chart reader.
On the other hand, the MACD is in the negative zone, caused by the fall in the last few trading sessions. Once the MACD becomes positive, it may be a good signal that the index had revived from a temporary correction. Nonetheless, most trend reversals happen when the MACD reverses its direction too. Thus, one may not need to wait till a positive MACD condition to confirm a bullish reversal.
Trend and Trendline
According to my swing trading strategy, the market is in a bullish uptrend in the long-term (1 year) and intermediate-term (3 months). The index has just had a month-long correction. This is simply the perfect time to enter according to my strategy.
Coincidentally, the index has bounced back from the lower trend line formed by previous bottoms. This may be a signal that the index is following the trend direction.