Nifty In Technical Charts: A Mild Rally To Sell Into

A lot of people were ready to throw in the towel when the market went down with a wide gap midweek on Wednesday. The news flow was negative, the FPIs were on a selling spree, the overseas advices were negative and locally, option players had shorted calls in substantial amounts. The gap down brought the indices to lower levels that had seemed difficult about a month ago. Few had envisaged that the market may fall. They did, when 20k plus levels were being hit.

But readers of this column may remember a chart that I had shown in the letter dated Sept. 15, where I had warned about imminent problems looming. I show the same chart from back then (chart 1) for reference, along with the commentary in that letter.

"…Median lines of pitchfork act as a good resistance. Even earlier, the prices hit it and soon bounced off it lower. Now, with sentiment somewhat mixed and perhaps a bit shaken, can the median line prove to be a wall that the Nifty may find difficult to cross? I would certainly look for it ." The Nifty hit a high at 20,270 (futures) and tumbled thereafter by nearly 900 points in the space of two weeks.

Market forecasting has two roles— one, it should give us an idea of how to make money from expected moves and, two, it should help us save money from being lost. In this case, those that followed the forecast, would have saved themselves from a lot of grief.

So, where are we now? Here too, I would like to feature a chart I had shown in a presentation I had made on Aug. 15 to our clients (also available on YouTube), where I had spoken about some declines and offered a Gann angle support coming up ahead. The updated chart is shown here (see chart 2).

In this chart, the rising trendline which the prices hit down from Sept. 15 high exactly on Oct. 4 was drawn and kept ready much in advance, using advanced Gann technics. Since this fall was already projected, it was not difficult to trade. Writing in the letter of Sept. 22, I had mentioned thus, “That said, we can use the same tool that we have used earlier — the Pitchfork channel to define a support...(where) it is noted that the lower channel of support lies around the August lows near 19,200. Situation is a bit worse in the Bank Nifty…(where) gives a support near 43,750.” These levels were almost reached by last week.

Now, there is something else that is of forecast value in chart 2. Take a look at the circled candle of Oct. 4.

This has formed what is known as a ‘key reversal pattern’ and the fall out of this pattern is to produce a rally that should carry the Nifty back to its most recent rally swing. This lies at the 19,750-19,800 region. Therefore, the extent of the current rally in the market can be expected to last till those levels. The Bank Nifty, however, doesn’t depict a similar pattern and hence, we can expect that the Nifty may be driven by stocks other than the banking pack.

But as can be seen on the chart, the support is still nebulous and even something slightly negative can trip up the rally attempt. So, I really wouldn’t want to put too much faith in its sustenance. As it is, my outlook for October is not for a bullish month. The next week may see the rally persist, but I don’t see it extending beyond. The ending two weeks of October, based on Time cycle studies, is suggesting a renewal of declines.

At the start of the September series, I had mentioned about the fact that the monthly candle of August was quite a bearish one and how that presaged declines if there was follow through. Fortunately, September did not show any further decline. But neither has the market moved higher. Hence, the danger posed by the August candle has not really gone away and this is something to remember. So, that low at 19,200 levels is still an important one for gauging the trend.

Will the jig be up if those levels are broken? Answer is no. In earlier issues, I have argued this point that so long as there is no narrative to sell out, the market shall only witness pullbacks. These shall produce reactions and not reversals. There is some uncertainty regarding the upcoming quarterly results season (set to flow from Oct. 12). Market will wait to see the first flush before deciding its trend.

Here is where Time analysis comes into play once again. I have already mentioned that the second half of October doesn’t wear a bullish look. This can be interpreted to mean that the market is not going to be overjoyed with the flow of results. Since IT and Bank majors come out with numbers in the first flush, it seems quite possible that the results there may not be up to market’s expectations. Exceptions may be there, but that would be on a case to case basis only.

So, if the decline is largely to be contained by end October and for a revival thereafter, then I don’t expect the dips to go deep, even if the August low at 19,200 is broken. The worst case scenario could be around the 19,050-18,900 area.

Long ago, I had featured a chart (during the market rise), where I had shown two stoploss lines— one for traders and the other for investors. I am reproducing the updated chart here again (see chart 3). Some readers may perhaps recall having seen this chart in earlier issues of this letter.

>>>>>CHART 3 HERE>>>>>

It can be noted that the stoploss for traders was triggered soon after the high for formed. But the stoploss line for investors has been trailing comfortably behind. However, it has now caught up with the prices some and is now poised around the 19,000 levels. I would certainly worry about my portfolio health and holdings were that level to be lost with some conviction.

The RSI indicator shown on this chart shows a drawdown to around the 40 levels after having hit 76. This shows the Nifty to be still within a bullish range only. Though FPIs have been net sellers in September and so far into October as well, the damage on the Nifty, as well as the Mid and Small cap indices has been quite limited. This just reaffirms my earlier statement that there doesn’t appear to be any narrative in the market for sustained selling and we are only seeing some profit taking.

So, we may have to see through this month of October, without causing damage to ourselves. Better times should emerge thereafter. I had already warned readers to pull back from momentum investing, as well as ease up on the trading. That advice continues. But with earnings season we always get some surprises and readers should be on the watch for those and make haste to get into such names if and when it occurs. That would be the main activity for the coming three weeks.

CK Narayan is an expert in technical analysis, the founder of Growth Avenues, Chartadvise, and NeoTrader, and the chief investment officer of Plus Delta Portfolios.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.