The end was marked by some huge swings—the kind we have not been used to for a long time. It started with a bang, with a wide gap created by the exit poll and built on that, pushing the Nifty into another all-time high at 23844 on the futures. Markets were quite ecstatic with the polls and maintained that tempo all through the day, particularly the Bank Nifty, which too ratcheted up a new high at 51486, closing near the high. With all the popular indices trading up, expectations were sky high for the following-day results.
Recall the letter from last week where I mentioned that the market seemed hesitant as it neared the results? This is what I had written. “The week didn’t go along expected lines. There was far too much volatility and also differential moves between the Nifty and the Bank Nifty too… The Nifty and Bank Nifty showed small body candles (Dojis)… One could say that the sentiment was “stirred but not shaken.”
One of the reasons was the unwillingness of the players to give it a resolute push when the chance was present. With both the main indices failing to charge past 23000/49000, the doubters chose to bail out of longs... The rollover indicated that short positions had been carried forward at the turn. Portfolio holders seem to have chosen to book some profits on their holdings, wanting to play it safe before the exit polls…”
What the exit polls did was flip over that uncertainty into total certainty once again! All those who had booked out or stayed away abandoned their caution and dove right back in.
What followed was a disaster created by a huge disappointment. The market virtually crashed on Tuesday, wiping out a very large chunk of the profits that were painfully constructed over the previous month or two! Nothing can damage the sentiments more than earned profits getting wiped out. Chart 1 shows the activity of the week on a 30m chart of the Nif Fut.
The fall was ~11% from Monday highs and the Nifty Futures almost hit lower circuits even as the Bank Nifty did. Max fears were triggered as these lower circuits were hit or neared. The Modi-associated stocks, like the Adani Group, hit 25% lower circuits! So, one can imagine the sentiment excess that got created in a single day. Most traders cannot handle this kind of swing and people are frozen in their minds.
But then, a very spirited recovery set in from the depths of Tuesday and the market recovered almost the entire loss, rising ~2100 points over the next three days. Again, a lot of people were left behind with this recovery. So, we are now at almost the same levels as Monday morning, but minus the high conviction that existed back then and a lesser participation. Instead, there is jubilation, no doubt, but the sentiment is nowhere as gung-ho as it was earlier.
Chart 2 shows the important levels that emerged from the week’s activity. Each is labelled. Now, these are the important levels to watch for a couple of reasons.
First, the market has shown a three-day rally—something typical after a decline. Next, the price has risen to almost fill the gap. One of the aspects of a rally could be reaching the levels of the close-f high bar (at 23407). If that doesn’t get exceeded, have a first level that the price must pass. then the rally is in trouble. So, we have a first level that the price has to cross. After that, of course, there is the all-time high and life beyond that. If that happens, the lower levels mentioned all become stop-loss levels or buy-dip levels. They would also be a signal for a retest of the value area of support (221866–908). A break from that would be bad news for the trend ahead.
Now, coming to another aspect—the comparison of recent corrections. Chart 3 shows this across recent times. There have been seven corrections that preceded the Tuesday decline and the average length of these corrections is five sessions. The average volume generated through these corrections is around 52 million shares. The average points in the last seven corrections are around 900. The one-day correction of the 4th has generated a volume of 54 million shares and a size of 2500 points! This is way out of whack with the average. The price is far higher than average, while the time is too low with the volumes being similar.
I conclude from the above that the price is overextended while time is falling short. This usually extends the correction and in Elliot wave aspects, this may lead to a complex correction unfolding ahead. Now, that may be difficult to handle using the same considerations as earlier. One of the possibilities is the formation of a higher high but this will not change the corrective nature of the moves. Be alert for this, for it will be a bull trap-type new high. While the low for the month may have been created at 21265, the path ahead may see multiple swings within the contours already established for the month. With swing lows of all corrections broken in the downmove of the 4th, the corrective nature of the moves ahead has been indicated. We should therefore think of upside forays as selling opportunities rather than breakout buy opportunities, until evidence to the contrary emerges.
It would be worthwhile to look at the status of momentum at this stage. Chart 4 shows an enlarged picture of the DMI indicator of the Nifty futures daily chart.
The main point is the expansion of volatility. Note that earlier moves (post Jan 24) were a phase of lowered volatility, within which neither an up or down trend could establish any dominance. This is indicated by the dashed lines. Then we had a bullish breakout around May 22nd, which was once again rudely reversed on June 4. The rectangle drawn is the next range of moves shown from the past—from around 45 at the top to 10 at the lower levels. The volatility of the last week has remained confined within this rage too. Note, too, the lack of directionality in the ADX line (blue line). Both of these suggest the continued corrective nature of the moves still in progress.
Chart 5 shows the RSI indicator in a close-up, with the daily and weekly picture (as an inset). First, let us look at the daily RSI.
Divergence is visible as it ranges (60–40 moves since Jan. 24). There was a slight increase in the trendiness above as the RSI breached the 60 levels mid-May onwards. It is interesting to note that the slamdown on the results day could not penetrate beneath the 40 levels, thereby keeping the trend status from turning down any. The inset is the weekly Rsi. Here too, the divergence is clear but note that the dips in the Rsi levels could not even break below the 60 levels! This clearly indicates a continued bullish hold on the trends and therefore any big fall can be ruled out based on current evidence.
In the last issue, I revisited the annual projection and the ranging possibility for June. The way the momentum indicators are lined is continuing to affirm that cycle-based calls for a June range. So, in all likelihood, with the outer contours of the month more or less defined (at Monday high and Tuesday low), short strangle trades may be a good way to go for the balance of the month. FII shorts were seen getting covered by some but still, a decent size is left over. That is to be watched for some clues. If that gets covered and there is no sizable upmove, then fresh supply has entered the market. A lot of the new buying has come from retail participants, as per the data. This is not a strong signal because retail trade also jettisons these positions quickly if the rally falters. And, if they get caught on the wrong side for any reason, this will cause some headaches for trends.
Therefore, it seems like we have several ifs and buts ahead of us to deal with almost every day. What is needed for further gains is a return of conviction. This will be dictated on the charts in the form of price action, momentum, and volumes played out, along with evidence of fund flows. So, players need to be nimble in the coming weeks. Looking at the time cycles for the coming week, I don’t find anything encouraging for the week ahead. So we may have neutral days with maybe a down bias through the week. This would obviate aggressive long trades. Or, take quick profits on longs. Or confine your trades to intraday rather than swing trades. A down move into the 14th seems possible. Tread with caution if you are a short-term bull. You can take some careful action if you are a short-term bear.
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 NDTV Profit or its editorial team
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