The market took one right to the jaw and possibly hit the canvas. Every sector succumbed to selling pressure on Friday and the week ended badly for traders and investors. Immediately, talks about much lower figures for the index started emerging.
The problem seemed magnified on Friday because the earlier part of the week was rather sanguine, what with the Nifty actually hitting all-time highs on Monday. Chart 1 shows the progress through the week. While the impact was felt on Friday, it can be seen that the prices had started to wither from the start of the week.
As ever, the market players keep looking for reasons to explain this fall. Overseas inputs were the first culprit and that included a wide gamut of rate cuts, Nvidia, inflation, dollar, and FII selling. Since most people have rather vague ideas about these matters (but talk about them incessantly anyway!) and, therefore, any response from the market, however small or big, is easily attributed to such triggers. There were really no local triggers anyway to hang your coat on, so we can conclude that it is a possible vague understanding of what is trickling in from the US.
Now the context in which these news triggers emerged is also important. The market, after the swing low of Aug. 5, has been edging higher slowly, and did that for some 13 sessions on a trot. Much was made on networks and media about this event. People are, as it is, suffering from a fear of heights and this hitherto unseen event of 13 consistent rising sessions only succeeded in feeding that nervousness even more. Hence, the newsflow came into a nervous sentiment and, therefore, the reaction was not something out of the ordinary. Perhaps what was not anticipated was the broad breadth during the decline on Friday and produced a loud "ouch" response from position holders.
But are matters as dire as it suddenly seems? Not quite, I would think. Let's look at the bigger picture here. Chart 2 is the daily chart of Nifty.
The first point to note is that the Nifty made an all-time new high. Now, this puts the trend in a space where all earlier signs of weakness are washed away. Now, several things need to happen for us to form a picture for the future.
The prior swing low of Aug. 5 now becomes the nearest swing low that needs to break or compromise for the directionality to be deemed to have changed. Will that change the trend? Not really. For a change in the trend, the pattern shown on the chart (of a lower top-lower bottom) needs to develop and then break the prior swing low.
Let's understand that for a pattern to form, it will take time—perhaps a few weeks too. Then, the level at 24,000 needs to break decisively. It is marked as the main support zone on the chart.
So, for those that are ready to throw in the towel here, these are the main points in price (24,000 break) and time (a few weeks for a pattern to form) to remember.
Can this happen? While no absolutes can exit for the markets, I would argue that the probabilities of it happening are pretty low. Why?
For starters, the money flow towards the market remains undiminished. The SIP flows continue; FII buying seems to be coming back, albeit in fits and jerks, and that has been the ruling domino so far. We have seen such reactions in the past and the market has pulled back from those every single one of them. I continue to maintain that until we see a trigger that can trip up the fund flow to the market, this trend is not in any danger of a big reversal.
Next, the feed is from overseas events (mostly) and there aren't really any big events or developments locally. As matters stand, it doesn't appear that any of these inputs seems large enough to create a trend reversal. For example, the rate cut matter and inflation in the US is a topic already done to death. Typically, something that is already in the market cannot have progressively larger impacts.
Let's look at momentum indicators. Chart 3 shows the RSI and DMI and the price with a 50 EMA. We can note that the RSI divergence is visible. But the DI lines are all truncated together and that means no signal from it. Further, divergences begin to have meaning only when there is a trend reversal shall occur.
In this chart, I have shown a 50 EMA as a trend measure. Look at the number of times the average has provided supports during the dips. As of now, this EMA is placed at 24,550. It can be noted that June 4 broke the average but pulled back instantly thereafter. An event was there, of course, and hence, we can overlook the break (as an afterthought). So, watch for some convincing fall of the line before calling 'out'. Not shown here but the TS-KS lines of the Ichimoku system are also hovering around that region, adding to the support there.
The Bank Nifty has been disappointing everyone repeatedly. Too many wannabe bulls here. Add in all those value buyers of HDFC Bank together with teaser higher moves from ICICI Bank and you have a nice hope soup. Lots of weak-hand buyers and put writers playing here muddles the waters even further. Surprised at the robust fall in SBI on Friday because didn't read any news about it nor heard any rumours. With the decline in Bank Nifty, I find put writers at 51,000 PE may be trapped. On Friday, we even saw a shorting of 50,000 PE, maybe because the prices rallied and created some hopes of theta decay? Who knows how these option shorters think?
The upshot here is that the weak hands all seem to be in the Banks area. One may, therefore, be somewhat careful while approaching banks in the coming week or two.
The week had its share of good news as Reliance jumped in with a 1:1 bonus-issue approval, but it seems like days when bonus announcements used to excite the market are gone. So, Reliance, too, weighed in a bit for the declines of the week. However, that is unlikely to persist ahead and hence, that trigger may not be available for bears.
Oil tapering down toward $70 is good news—very good news, actually, for India. OMC stocks saw a burst upward, only to give up gains by the weekend. Again, a problem of weak bulls, I would think. If you see chart 4, weekly chart of crude, you find prices down into an important support zone, but the momentum seems to be clearly downward. Plus, resistance is nearby in the next week for any rally attempt to succeed. If 70 breaks, then this factor shall overhaul other bearish inputs in our markets and create rallies in the Nifty.
Next data watch in the US is not till Sept. 18, when the rate-cut matter may come up. So, focus may shift back to our local shores, I think for daily inputs. Hence, after a pause or two, we should be looking up again, I think. Let's see.
Summing up, my upside view is not changed. There shall be periodic interruptions by way of dips, for that is the nature of the market. One such is going on right now. But I expect that market to right itself towards the upside very shortly. Hence, patience to wait this out is called for. In a bull market, buying dips is the way to go. Well, you are getting one right now.
Check out your favourites to buy now. Keep some stops, of course, for we don't know anything for sure. But probabilities are for upside resuming and this week's fumbling is just some nervous responses in a slightly shaky sentiment. With a decline, most will turn happy, labelling what has happened as being "healthy." We should then be off to the races.
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.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
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