Nifty In Technical Charts: Trend Is Still Hopeful Of Upside Breakout

Typically, when you have such tight ranges building up, you should expect a breakout from this situation. The trend is still up, so the ideal breakout is to the upside. The Gift Nifty may signal some bias on Monday as our market is closed. So, looking at that, we could try positioning ourselves.

Levels for the coming week have been revised upwards. The higher breakout point would be 23,500 and the minimum expectation is 23,610. If this zone cannot be exceeded convincingly, we may slip into another consolidating week. The lower side support continues to remain in the 22,900-23,300 zone and so, dips into that zone can be used to buy, if seen during the week. The outer limit for bullish estimates for the month continues to remain 23,800 (near all-time highs) and as long as the Nifty doesn’t come down to test the supports (it didn’t last week), there is always a chance for a push upward.

The Bank Nifty breakout point too has been shifted higher, towards 50,200 levels. It needs to get past and hold above those levels to sustain its rise. A slide below 49,700 would put paid to bullish expectations. So, both trigger points have been given and they hold good for the entire week.

Now that we have dealt with the immediate levels of importance, let's divert our attention to the bigger picture. The analysis remains largely unchanged from what I had written last week. Reproducing from last week's letter, “price is overextended while time is falling short. This usually extends the correction and in Elliott 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 a 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 21,265, the path ahead may see multiple swings within the contours already established for the month. With swing lows of all corrections broken in the down move of the 4th, the corrective nature of the moves ahead has been indicated.” The change that one could indicate here would be the continued spirited rally post that dip of the 4th. That puts the bias in favour of some upside push but still doesn’t change the situation of such a move being a continued correction rather than any new move.

Therefore, the advice not to be aggressive on breakouts higher continues. One may maintain a buy-dip policy but do take money off at higher levels when seen. Last week, HDFC Bank and Reliance pushed the Nifty a bit higher and if they sustain in the coming week, the bulls can breathe easier. Other banks didn’t really chip in but they didn’t exactly drag either. So, the key may be with the banks and for us to get a cue on Nifty moving towards breakouts. If they fail to click, then weekly supports will be tested. Stocks from Nifty Next 50 seem to be in a much better situation and if they continue to play, we should have a lively market without major push from the prime indices. This would be one of the things to watch during the week. Chart 2 shows some of the big movers from the Nifty Next 50.

Therefore, it appears that we may have to cast our nets a bit wider in order to catch the fish. This doesn’t apply to index traders as they can play strangles or ratio spreads and switch to backspreads if trend signals emerge. Stock traders, however, would need to hunt for relative outperformers and get into them quickly. One thing for sure though—no shorts are to be attempted as there are no signals to do so. In the markets, many times, not doing the wrong thing is perhaps as important or even more important than doing the right thing!

In last week's letter, I had spoken about the momentum signals and how they were not damaged and that still held out for the dip-buy approach for the short term. This week, I show a sentiment indicator plot on the weekly chart of Nifty. This is something that I refer to every now and then when the evidence turns slightly hazy. Chart 3 shows this sentiment indicator. It reads ‘Hopeful’ as of last week—and that would, I think, accurately capture the sentiment of the current market. On the daily chart, the reading is showing a rating of Neutral—which also is a correct interpretation of current sentiments.

When you are rated Neutral or Hopeful, it is evident that the market becomes sensitive to news inputs. Now, we have seen that the market is choosing to ignore or shrug off bad news. The quick recovery from the June 4 lows is a clear signal of that. So, now any news that can be deemed positive would probably tilt the balance in favour of continuation of the advance. We have already defined the price points that will tell us when that is happening. But sentiments cannot wish away the force of cycles—and the time element of the correction cannot be overlooked. That too has been explained through the argument for a complex correction. Readers are advised to go over that part of the letter again so as to develop the correct perspective to address price action next week.

The budget shall be the first document from the new government and the budget session may be called in the third week of July (as the first session ends July 2). So, understand that we may have to wait for another few weeks before more concrete evidence is available for us to bet on the trends. Note also that by that time the June quarter results for the current financial year shall start rolling in and we shall have additional information on corporate performance. This, combined with the budget proposals, may throw up new or fresh candidates and sectors for us to concentrate on. I reckon the big players may not really move aggressively until this combination of events happens. Till then, the ranging action may continue and everything will boil down to stock-specific action. These tend not to last too far if the tailwind of the market move is missing. Hence, the advice continues to remain similar to last week—be alert for stock-specific action, take money off when you see profits, avoid shorts, and don’t plan for big positional plays for now.

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.