Nifty In Technical Charts: Decline To End Early This Week

…. a five drive down and thereby setting of a larger correction? Perhaps. It is a fact that we have not had such a pattern any time during the past corrections. So, this has to be given weight. It was also mentioned that since the decline was being seen from an important price resistance (also day count), that lent more meaning to the decline and hence expectations were for more declines ahead. Then this was added. “If repair has to be done, then it would mean that the Nifty needs to revive from current levels. Also, if prices continue to fall, it will change the relationships of the five-leg decline and that has a different import altogether- something that we can deal with later. Sufficient here to state that if it were to occur, then we are looking at deeper corrections. Not good news.”

Chart 1 captures what happened since then. It also has a few annotated items.

In line with the last letter view, there was a halt to the decline but a very weak correction followed and about a week later, the decline resumed. So, the deeper warning that was warned in the last letter manifested.

The chart has Angle lines, Retracements, 200 ema added. It can be noted that the prices could head towards 23865 area which would create a confluence zone with angle line square out, 50% retracement, equal projection of first leg down from the top etc., with the 200 ema slightly below, around 23,500 area. So, seems like a bit more to the downside in the week ahead, but limited to a couple of hundred points from current levels. If you have survived till now, then you can survive the balance too. So, don’t panic here. Even if trapped with longs, you should get a bounce to get out with lesser losses.

Speaking about FII selling (a big topic of discussion right now), this is what I had written, “In long liquidation, there is determined selling through the day and there wont be a rally intra day at all... note how sustained the pattern of decline is- not a single rally on all three declining sessions while the quantity was being sold. It is only after the quantity for the day was completed that you saw some small pops. But since the activity emerged again on the following two sessions, trying to look for targets or bottom fish would have blown up in the face.” It is evident from the chart above that the selling has continued unabated and now we are almost at 1 lakh crore for October-and counting! See the lack of pop all thru the decline- clearly exit selling is in progress. That is $12 billion outflow, enough to cause a dent in the proceedings.

Refer to chart 1 again and note how there is one more support zone popping up near 23,865 area- the earlier swing low. Now, recall a line I have stated often in these columns- reactions break one but not two of prior swing lows. Well. We are running into a second swing low behind and around that is placed a bunch of supports too. Hence chances are that the decline will run out in the coming week.

But before anyone thinks that it is good news, let me hasten to add that it may be so for investors (for a chance to buy) and for some traders (trapped with pending longs), it may not be of a different good news for others. For one, those who have succeeded in playing shorts in this fall need to be on the alert for end of their activity. They now need to see whether prices can work up enough steam to move higher.

Now, this can happen only when the prices can move higher and hold higher. That is one way. The second would be to wait for support zones to reach and check for reversal signal over there. The choice of which is better is entirely dependent on one’s trading personality. Given the consistency of the decline, (see chart 2), I would suggest waiting for some drop into the next support and then check for reversal candle patterns before plunging in. Since the index has fallen much, there are many resistances above, stretching all the way to 25,500 and an easy passage may be difficult to consider as of now. So, reversal from support it is. Alternately, patient traders following the intermediate term down can wait for rallies into resistance and short, too, as there may be several fits and jerks before trends start.

As discussed earlier, the cluster of supports is around 23,865 area. I would start checking for reversal candle stick patterns from, say, 23,950 levels onwards and build longs for a rally. Upto where? 24,600-24,775 would be the first range where we can reassess. In a sequence of falling resistances over the last few weeks, next week’s trading (unless very robust) should ensure a further drop in the resistance zone, which then, can bring prices up to a point where crossing of those resistances could be considered a possibility. Right now, it is not. So, keep expectations limited.

News flow over the week has been poor with many leader stocks come in with weaker numbers or not so encouraging commentary about possibilities ahead in coming quarters. Certainly not doing anything positive for the sentiments. Will need an outlier or two to snap the index out of its decline.

Mood has changed from forgiving slippages to punishing them. Hence numbers that show ordinary profits or those along expected lines wont be able to do the trick.

But small and mid cap indices took a big knock last week, with popular sectors like PSU, Realty, Metal etc. taking a big knock. And it is just not the last week- they have been doing badly across the month too. So, portfolios are beaten down and that does the most damage to sentiments. If the earnings season for H1 continues, then recovery may become difficult in both the small and midcap spaces. Typically, this leads to out sized gains in the stocks that manage to surprise the market. After all, the money on the sidelines has to go somewhere and tendency will be to change the surprise givers. Chart 3 shows the Smallcap index where the trend has turned down this month and the long body candle does raise a cause of worry. Big moves start with long body candles. But one is a bit assured by the presence of the long-term support trendline slightly below the current prices. So perhaps, there may still be hope to be held here. However, it is to be noted that the market has put us all on notice here and the earlier complacence that prices will come back from declines may be put to test this time. This is important because most wealth of retail is tied up in the small and midcap stocks.

By this same yardstick, one could well ask, will the Nifty not remain safe until another 1,000-odd points lower? The answer is Yes, as a similar long-term support trend line would come in near the 23,000 mark. But I am not discussing that in a weekly letter because most traders live and die by the next couple of 100 points on the Nifty, given that they are into short term swings or day trading with long options. However, in case of portfolio holdings, people naturally think in terms of months and hence those type of tools become relevant when analysing those indices.

Rounding up, sentiments are badly bruised, momentum indicators are into deep oversold zones, absent trapped option sellers, prices nearing some support sentiments etc., the market may remain in some trading range type scenario for a week or more. Further downsides may remain limited to the 23,900 area while upsides may be limited affairs too as overhead resistance is in plenty as of now. So, it may certainly not be a time to be very active right now in the market. It will be better to wait to spot some good opportunities in trading too, let alone investments.