Narendra Modi's landslide victory in India's elections spurred hopes that Asia's third-largest economy would soon see growth-supportive policies. Stocks rose sharply in the run-up to the elections and while post-election sentiment may see stocks rise further charts indicate that a quick retracement is possible.
In March 2014 the NIFTY 50 broke decisively above 6350, which had been a major resistance level since January 2008. It was previously tested in November 2010, and more recently acted as a strong resistance level from November 2013 to January 2014.
The NIFTY had formed a very wide trading band with support located near 4650. Support was tested in December 2009, February 2010 and again in December 2011. The width of the trading band is measured and this measurement is projected upwards to give a breakout target near 8000.
Read MoreHopes are high for a Modi-fied India
The key concern is the nature of the breakout. The NIFTY has developed a parabolic trend. These trends are found most frequently in bull markets, or markets showing volatile rebounds. While parabolic trends are usually seen in fast-moving stocks, they are also present in fast-moving index areas or markets.
Parabolic trends are best described using an arc, or a segment of an ellipse. They start slowly then accelerate very rapidly until activity on the price chart is almost vertical. They cannot be adequately described by straight edge trend lines; instead the price action uses a parabolic curve as a support level.
The key problem with parabolic trends is the way they end – (usually) rapidly and with a substantial fall. The trend line approaches vertical so there comes a point when the next candle will inevitably move to the right of the parabolic trend line. This is the signal for the end of the trend; often the price will gap down and then fall dramatically.
The retracement in this trend is usually between 50 percent and 100 percent of the original rise. For the NIFTY that's a potential retreat to below 6600 on current index values. However, combined with the trading band analysis, which suggests an upside target near 8000, a 50 percent retracement would have a target below 6800.
In either case there is potential for a major trend retreat. Traders will protect profits as the NIFTY moves towards the 8000 target level and will close positions and go short when the index moves to the right of the parabolic trend line.
Parabolic trends offer fast-moving momentum profits, but they carry the danger of rapid and significant trend retracement.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.