In my previous article, we had clearly outlined that the Nifty index was exhibiting weakness, supported by both Traditional Technical Analysis and Elliott Wave perspectives. Since then, the index has experienced a sharp decline of over 1400 points. See the images below.
Now, the pressing question remains—what comes next? Though there are no immediate signs of a confirmed reversal, two powerful trade setups—the Squeeze Setup and the Holy Grail Trade Setup—suggest that we may be nearing a crucial support zone around the monthly 20 EMA (22,400). These technical frameworks, backed by historical patterns and price action principles, indicate that a strong bounce could be on the horizon. Let’s dive deeper into this analysis.
The Squeeze Setup: Mean Reversion in Play?
The Squeeze Setup, as explained by John F. Carter in Mastering The Trade, is a potent tool used to capture explosive price movements as well as mean reversion plays.
Back in May 2023, I had shared the Nifty Monthly Chart on Telegram, highlighting a Monthly Squeeze in progress.
As expected, the Squeeze fired on the upside, leading to an extraordinary rally of 7,750 points (42%), culminating in an all-time high of 26,277.35.
One of the fundamental principles of the Squeeze Setup is that once an asset deviates significantly from its 20 EMA, it tends to revert back to this level, which acts as a dynamic support. Currently, the monthly 20 EMA is placed around 22,400, making it a strong candidate for a potential support level.
To explain this concept in greater depth, I have planned a Free Webinar on the Squeeze Setup on March 2, 2025. If you want to master this powerful setup, you can join the webinar using the link below
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The Holy Grail Trade Setup: A Reversal Signal?
Another key technical setup aligning with this view is the Holy Grail Trade Setup, introduced by Linda Raschke in her book Street Smarts. According to this setup:
When the 14-period ADX rises above 30, it signals a strong market trend.
When the price subsequently retraces to the 20 EMA, the probability of a retest of the most recent high or low increases significantly.
On Nifty’s monthly chart, the necessary conditions for this setup seem to be met. This further strengthens the likelihood of 22,400 acting as a strong support and initiating a meaningful bounce. See the image below
Why a Bounce Looks Likely?
1️⃣ Oversold Daily Timeframe: The index is heavily oversold on the daily chart, increasing the probability of a short-term reversal.
2️⃣ Confluence of Technical Setups: Both the Squeeze Setup and Holy Grail Setup suggest that the 20 EMA could act as a major support.
3️⃣ Mean Reversion Play: The index has deviated significantly from its 20 EMA, and history suggests that reversion to this level often triggers a relief rally.
4️⃣ Sentiment & Market Breadth: Sentiment indicators suggest excessive bearishness, which is often a precursor to a counter-trend bounce.
The Big Question: Bounce or Trend Reversal?
While a technical bounce seems imminent, whether this will lead to a full-fledged trend reversal remains uncertain. For confirmation, traders should closely watch:
✅ Price action at 22,400 – Does the market hold or break this level?
✅ Volume-backed bullish candles – Signs of aggressive buying at key levels.
✅ Follow-through momentum – Sustained upside movement post-bounce.
Final Thoughts: Time to Take a Calculated Risk?
Given the combination of an oversold market, key technical setups, and the historical significance of the 20 EMA, it’s worth considering the long side at these levels. While risk management remains crucial, traders with a calculated approach may find an excellent opportunity here.
As always, let the charts guide the trade, and stay disciplined with stop losses in place. Whether this is just a bounce or the beginning of a larger move, the risk-reward equation looks favorable.