Nifty In Technical Charts: At Inflection Point For The Near Term

Pretty tumultuous week we have had. Not unexpected, as we have already discussed the volatility in earlier letters.

Let's first look at the moves across the week and see how it panned out against expectations. Chart 1 is the intraday view of the Nifty through the week.

The selling, which began last Friday, was in line with the long-term projection. This extended through the week and rallies were curtailed. The first of the turn dates for February was projected for 9th and on that day, the market showed some weakness and the slight recovery towards the end of Friday seems to be a dull affair, probably short covering.

The weekly range is 22,110–21,674 on the futures. The important thing with turn dates is to check the following days of trading. This is because the trend has two choices—to accelerate in the current larger trend or reverse the larger trend.

We can deduce that from checking trading patterns in the coming week. If the prices continue below 21,674, then the path of movement would be along the forecast chart given last week. I am reproducing that chart here once again for reference of readers. See chart 2.

The targets shown thereafter are conservative ones. We can revise them as we go along. For those wanting to check those out, they can refer to the daily notes I post on my website under 'Insight'. Depending upon the momentum that develops, the targets can overshoot on either side.

I would certainly be wary of a down break of Friday lows and if seen, would want to wind down the bullish action that we have maintained so far. Would I recommend shorts? Those would be for active traders who can also implement stop losses.

I say that because this market still carries a high sentiment overhang and that often creates swift, sharp rallies during intermediate downtrends. Missing these can be disconcerting.

The other possibility is that the prices move higher than Friday highs next week. In that case, there is a possibility of the market moving higher, till the 22-25th of the month. In that event, we may see the Nifty hit further new highs too.

So, the market is actually at quite an inflection point for the short term. One would need to be adroit to deal with it. This should be evident from the changes in the breadth of the various sectors. In the last week, for example, there was a distinct bullish tilt to the makeup and this week, we see a bit of a slip in the weekly sector performance.

I had mentioned that the PSU bank space may continue to be in play, and we find that it is the top performer in the last week too. Even the other two top spots are held by the same names—Energy and Oil & Gas. Making good strides are Pharma and IT and I would expect these two to still be in play in the week ahead, maybe trumping PSU banks and Energy as well.

The biggest pain point for the market is the shellacking that the private banks are taking, and they took a 2.88% beating in the week. While they may appear tempting as prices have drawn down, the bigger question is whether they can rally swiftly. On that count, I have some misgivings as the delivery quantity on these names have been increasing steadily, implying exit by long holders and traders switching to trade shorts in them. As a consequence of their decline, their weightage in the Nifty has dropped nearly 5%.

The earnings season has run on now for three weeks and by next week, most of the biggies would have been out with their numbers. The record has been pretty decent so far. Approximately, some 1,900 companies have declared results and of these, about 1,200 have shown positive profit growth and around 660 are showing negative profit growth.

This is a good ratio, showing the trends are likely to stay robust, and considering that hardly any nasty surprises came from leader stocks, the sentiment can be one of continuing to be buyers at lower levels. There is plenty of money around and the SIP component is only increasing. FII flows are a bit ambivalent this month, but the market seems to be pretty okay with that at the moment. In the Nifty, 31 have shown decent growth in profits compared to only eight that have not, and four can be said to be neutral. So, there too, a positive bias.

Placing the expected near-term decline in this context of overall positive business trends, we can conclude that the market may undergo only a limited amount of correction and also, that the correction may be more in terms of time rather than in price. However, there are still many soothsayers out there who are calling for sharp declines and deep corrections. I am not among them, for, as I explained in an earlier letter, the market trend is composed of three parameters—valuations, which not too many are worried about yet, liquidity (still in plenty) and sentiment (which is in fine fettle right now). If all the three are still not even shaken (leave alone being stirred), then anxious buyers will ensure shallow reactions.

The Bank Nifty is to be traded using a range. Higher volatility in a smaller daily range is making life tough for those who favour option trades in this index. Consequently, the zing that used to be there every week seems now to be steadily decreasing. Overall, this index remains in a sell on rally mode in contrast to the Nifty. For further declines, if any, in the coming week, 44,500 is the level to break. Upsides seem capped near 47,300–800 area.

The IT index seems to have clawed its way back over the past few months. Frankly, I had not expected it to do as well as it has done (and had even written so a few months ago). See the chart.

But it does seem like the strong action from the second-tier IT stocks has kept the flag flying for the sector, allowing the leaders to catch up with their trends. Which they did, mainly owing to very low expectations attached to their results. But, by the end of the week, Tata Consultancy Services Ltd.—the top dog of the sector—has moved to fresh all-time highs again.

Notice the formation of a nice rounding pattern on the monthly charts. This is suggesting that there may be a 25% further improvement in stock prices of leaders. TCS, Coforge Ltd., etc., too seem to be showing such a pattern. A strong surprise result from the sector was Oracle Financial Services Software Ltd., a dog from the past, and the market rewarded it with a huge thrust. One can therefore keep an eye out here for some good trading and investing candidates in the future.

Summing up then, the trend is at an inflection point over the near term as desire to book profits locks horns with high liquidity and lack of bad news.

The first is a strong desire after a big drive in the trends, while the second is a fact of today's market. News flow waxes and wanes and currently, the sky is still blue all over the world. But, the wars rage on (Ukraine, Israel, Houthis), inflation is not yet tamed, debates about rate cuts flicker on. This means some conflicting news will emerge every now and then, perhaps more from the U.S. as the main news now in India is the election in April–May.

So, we may have to remain tuned to the U.S. market trends which, although sanguine right now, might also turn on the proverbial dime because there are so many naysayers there and there are a lot more items in the broth (yields, rate cuts, inflation, valuations, dollar, China growth, recession possibilities) and it is a difficult call right now. This should ensure volatility to be still present. Hence, a vigilant attitude is necessary to create fresh alpha in this market.

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.