Nifty In Technical Charts: Volatility May Be Seen, But Buy At Dips

The two indices moved in tandem for the initial part of the week, only to diverge a bit towards the end. The Bank Nifty wilted a wee bit, ending below where it began the week, but the Nifty 50 seemed too comfortable to maintain a higher bottom through the week.

So far, nothing has upset the trend.

The misgivings, if any, are present mainly in the intraday charts. The intraday charts are therefore quite linear, as can be seen in Chart 1 (30-minute Nifty Futures). The indices moved comfortably towards the target zones as given in last week's letter without providing any surprises to traders during the week.

There is a possibility that the weakness seen on Friday may spill over into Monday. We could see some pressure on that day, helping to send the indices to their near-term supports. Most of the time, prices tend to get sent back to one or two swing lows. On chart 2 (daily Nifty Futures), there are three swing lows bunched up near the 18,600–18,700 areas.

Given the current upside bias of the market, I don’t believe that the prices can drop as low as that. Therefore, the areas we can look for to be retested are the few gaps left on the way up. The first one is rather near, and hence it should be the second gap present around 18,950–19,075.

The situation is quite similar in the Bank Nifty. A clear consolidation support zone near the 43,400 area should provide outside support. The gaps are present at 44,350–44,550 zones and below at 44,100–44,185 zones.

Let us take a peek at the momentum charts. Last week, I stated that if the momentum faltered, it might jeopardise the upward movement. Chart 3 shows the momentum setup. There isn’t any signal of deterioration on the daily charts, so the chart shown here is the 75-minute chart of Nifty Futures. I use 75-minute charts instead of 60-minute charts because we get five equal slices of the day within this time frame, whereas the 30- or 60-minute charts give us incomplete bars.

Here we can see some slight declines accompanying the fall in prices, but no patterns. Hence, we have to expect that the prices will dip into some supports and then revive. The wide consolidation zone of 18,900–18,700 could be a good place to rest if declines push that far.

The bank Nifty momentum readings are less robust compared to the Nifty. Hence, we need to watch the Banking pack to see if they continue to slide, in which case they may pull the Nifty down along with it.

With the exception of Reliance Industries Ltd., the other Nifty leaders are not really looking so spiffy, and hence, the index may be susceptible to weakness emerging in banks. So, the big bank stocks hold the key to the extent of reaction in the week ahead.

Speaking of time cycles, the weakness for this month may have been back-ended for the last week. For sure, I expect the fall to reach a low in mid-August. But the time count in July seems to be getting crunched into some volatility for the second half of the month. There could be some volatility at the start of the week, which will raise the market until around July 13–14. Then another patch of volatility would pull the markets down during the rest of the month. None of these downpours are really deep enough to scare us, but they do need to be expected. Only then can you plan for it. So, swing traders can still be buyers during dips into defined supports.

I had also spoken last week about the rise and rise of options trading. In this connection, one of the data points from Friday stood out prominently. The FII bought 32,000 crore of options on Friday. This is a pretty large figure, not seen in recent times. Usually, when they have a figure of 20,000 crore or more, it suggests some volatile moves for a couple of sessions at least.

Large call open interest positions exist at ATM strikes, and PCR has dropped sharply. FII data reveals that they have bought both calls and puts, so it seems like we may be set for a volatile start to the week. Client positions show large put shorts, so are there any chances of this apple cart being toppled? Option traders should be careful on Monday and Tuesday to avoid getting trapped.

The action in the second-rung stocks is pretty strong. PSU banks, along with scheduled bank stocks, are faring well. Autos were in good demand. Pharma is seen in continued play. These may be sectors to seek out for dip buys on Monday and Tuesday.

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.