Nifty In Technical Charts: Poll Victory Seals The Lower Levels Now

The gap of last Monday was huge and kind of made it to the record books. While the upward traction of the Nifty was certainly expected once the BJP swept to power, the very robust action of the Bank Nifty was certainly more than expected. It opened higher but then went on to add a further 1000+ points after that wide gap!

We had already discussed in the earlier weeks that the shorts may be in the Banks rather than in the Nifty. This was clearly the case as buying into leading Bank heavyweights. The big move across the week was more from short covering than fresh buying. We did see new delivery-based buying emerge on subsequent days in private bank stocks and SBI, pushing the index along but much of the gains, I would think, came from short covering. By the end of the week, however, the equation had got almost reversed, with the PCR on the Bank Nifty moving to 1.3 levels and put shorts now dominating all the way to current levels (47000 strike). Activity in the Nifty options has been evening out across the week and PCR at 0.96 indicates a neutral status. However, in the monthly series for December, the positions lean towards neutral with straddle positions created in both indices. So, it seems the option players seem to be taking a guarded stance here.

Is it really warranted? History is on the side of the bulls for December. In over 75% of the cases since 1979 (start of the Sensex), December has proved to be a positive return month, averaging around 2.8%. In addition, there is another statistic that says that December preceding a Lok Sabha election year has almost always been a positive month. This is data based on 11 preceding election patterns and the only exception has been 1998, when the world was caught in the global financial mess. Given the historical evidences, it would seem a cautious stance by option players may seem questionable. But given the fact that the month has already seen a move of about 4.7% already, it doesn’t seem so out of place either!

News flow, over the week, was quite positive. Crude dropped further, Gdp numbers came in solid, RBI held rates for the fifth time, growth at 7% was projected by the RBI governor, U.S. markets hit all time highs, SIP flows continued to hit new highs (Rs 17,000 crore now), FPIs continued to be net buyers in the market etc. etc. This provided sufficient fuel for the trends to remain aloft. The Nifty has almost reached the second target at 21,150 given in the last letter. Now, plenty of calls for higher indices are flowing in the media. Let’s us see whether that is likely to happen.

Chart 1 for this week looks at the price action from the point of view of where the liquidity may exist. There are zones marked in green (support) and in red (resistances). After the strong run of Monday and Tuesday, the index made a halt on Wednesday, which it has respected till the end of the week. This should make the liquidity in that high price area as supply zones (and hence resistance) until they are overcome. It also shows the zones from where fresh liquidity provided the necessary fuel to send the prices higher. These can be seen at levels of 20,825 and below that at 20,650 zones. Typically, during a reaction phase the prices drift to the lower bullish liquidity area to find fresh demand. Alternatively, if prices cross over to new highs in the week ahead, fresh supply zones will have to be awaited to estimate resistances based on liquidity. Given that the market has been rising for 30 sessions almost at a trot, I would want the market to prove to me that it has intentions to continue undeterred rather than just assume that it will.

In case the prices continue higher past 21,250, then we could be looking at targets around 21,500 and 21,850 areas ahead. In such a case, the most recent swing low at 20,940 can be kept as the nearest stop area.

As usual, I provide the Time calendar for the month of December. It shows that the early part of the coming week should continue to see the market rise and we continue to see the month largely peppered with positive days. Some profit taking can be planned by 22^nd, as the last week of the month has just one bullish signature. Using other methods to measure time, 12^th Dec comes in as an important immediate change in trend date. We can note in the Calendar that after 12^th, the next bullish signature is not until 20^th. So some caution advised in the 13-19^th time window.

It may be noted that this Calendar is a guide and shows some probable set ups. Cycles are subject to turn and these views are arrived at using some static cycles. But often cycles get influenced by other cycles of differing amplitudes. So, one safety valve you can build in would be thus: If a day is marked as positive then that day’s high should, ideally, be higher compared to the preceding day. If one the other hand we find that the low of the prior day is being broken on a positive day, then there is a chance of an inversion and hence the positive advice for that date should be ignored. Gray marks are for dates that have both bullish and bearish signatures. On such dates, one should look at the price action using the H/L of the first 30 min of the day and choose the direction that the index chooses. The dates marked in White are indeterminate where neither bull or bearish signatures are present. Many times, we can look for a trend to spill over into a Gray or White date as the previous momentum may carry. These are broad guidelines for usage of the Calendar. Particular attention may be paid to the monthly expiry time window to plan trades for carrying them. An example of this is mentioned in this week’s letter above.

Chart 2 is a depiction of Gann Price and Time squares drawn on the Bank Nifty chart.

I note that the Bank Nifty has just crossed a time count line and is seen heading for the price line above. The next time count for this index comes around 11^th Jan 24. There is some more steam left in this index as the individual stocks seem to be readying for more moves ahead. So, perhaps the price action may continue higher along the next higher price angle. See such a travel between two-time lines earlier in May as an example of what I am saying here. That move lasted till Aug before the lower support line was broken.

If the Nifty is unable to sustain above 21250, then activity may shift to the Banks with perhaps other sectors dropping (to keep the Nifty contained). However, if the Nifty gives it a charge, an improving Bank sector will probably push the Nifty to the higher targets mentioned above. So, an interesting time ahead based on the moves of the Bank Nifty.

Any move needs persistence of Momentum in order to continue. So, the next chart (no 3), shows the daily Nifty with a modified RSI as well as a cluster Oscillator. The arrow marks denote where the oscillators have flashed buy signals on the Nifty. A small rectangle has been drawn between the two signals. It is seen that the prices moved slowly after the Rsi signal but took off once the momentum really set in (as revealed by the cluster oscillator in the lower panel).

As of the last week there doesn’t seem to be any disturbance to the momentum structure and hence chances are we will not have an immediate reversal.

But it is worth noting that momentum readings dissipate if prices start to consolidate too. One has to be alert to that aspect and not be complacent that the momentum indicators are in fine form. On the price chart note the three successive Doji type candles, so the Nifty may already be starting that move. If prices spurt again, then the good momentum set up will enable continuance. I mention this to underline the fact that one should not hesitate to buy if there is a continuation because at high levels, it is natural to feel hesitant. So long as the technical indicators are clear, one should stick to their commands.

Summing up, the Bank Nifty seems set to take centre stage once again, after a long hiatus. In the absence of any reversal signals from the prices, one should continue the long positions from earlier and maybe even partake in fresh signals, if they emerge. At the same time, consolidation signals may emerge ahead that may not meaningfully damage the technical strength present currently. There is no change in the view that dips will continue to provide buying opportunities. Those levels are already highlighted in the discussion at the start of this article. Time counts have been provided, which too may be taken note of.

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.