Nifty In Technical Charts: Declines Done For Now?

The market got clobbered all the way during the week that just ended, and the small recovery on Friday was a meagre effort by the bulls. In the last letter, I had continued the bearish forecast into the week and said that matters will turn worse before they can get better. Chart 1 shows the intraday picture of the move over the week.

So, as far as forecasts go, this was a pretty useful one and hopefully readers were able to make use of it.

Actually, this was in continuation of what I had written in the letter dated Oct. 6 thus: “So, if the decline is largely to be contained by end October and for a revival thereafter, then I don’t expect the dips to go deep, even if the August low at 19,200 is broken. The worst case scenario could be around the 19,050-18,900 area.” That is pretty much what happened so far. Also mentioned was this: “So, we may have to see through this month of October without causing damage to ourselves. Better times should emerge thereafter.” I think, if one had planned the month based on the guidance given, it should not have been difficult.

The question now is, can the market go down lower? That is what most people are worried about. It was evident on the charts from around mid-September (where I had made the first of the bearish calls for a decline), but people seem to be joining the bandwagon for declines now.

The answer to the question is a No. Once a price-and-time target are hit, we do not expect more action in the same direction without there being a counter trend rally (or reaction). Therefore, the gapped upmove of Friday could well be the onset of a rally that may unfold over the coming week or more. We should await evidence from such a rally, if one were to unfold, and then decide further course of action.

Just to hark back to the past again, remember this chart from some time ago? See chart 2. The indices have retraced all the way down to the line that I had marked as ‘Stoploss for investors’, but not broken it yet. I don’t think it will, because we have it already down to the price-and-time zones and therefore, I expect the market to survive this assault on its trend. That trendline is quite near the 38.2% retracement zone that has now been hit and possibly should hold. If it does that, in the week ahead, then the reaction could be deemed to be completed, at least for now.

So, if the conclusion here is that the reaction may be done, then a rally should be due. 19,415 should be the first port of call on the pullback (around 50% of the decline). Spillovers could take it to the 19,650-19,820 area as well. Important time count dates for November are 10th and 24th.

If prices rally quickly, then the targets mentioned shall be reached. But if prices move slowly and eke out time till the second turn date for the month, then chances are that the market will either fall short or go even further from the price targets given (because of crossing of resistances). So, the pace ahead is the important thing to watch.

I do believe, though, that the pace may be somewhat languid and hence, 19,415 is to be considered the bet for now. Look at chart 3.

This shows the daily chart of Nifty in Heiken Ashi style and accompanying that is a modified ADX indicator. Two things are apparent here. First, the HA candles are clearly bearish yet and do not show any chance of a big revival right away. Two, the ADX indicators are in a clear bearish mode and will take some time to reverse. For both these signals to get reversed effectively, the index will have to make some good and consistent strides higher.

Now, that seems tough to happen on mere short covering. The FII data in derivatives does show a preponderance of index shorts by them. So, short covering is a distinct possibility if news flow emerges. But these are usually quick affairs when it does happen and hence, fizzle out quickly too. So, for moves to sustain, we will need to see news flow (domestic and foreign) to be consistently positive. Hence, news flow is something to watch out for too, in the coming weeks. Prices can move swiftly, but it takes time to reverse and establish a trend, even in the short-term.

The above is of greater importance to traders. The fact that the investor guideline has not got triggered is suggesting that investors should probably be using this fall to add more stocks.

A word on this ‘adding’ business. People generally prefer to add new stocks to their portfolio during dips. Many think of it as diversification of risk. That may work for a passive investor but for an active market player, concentrated bets are better games to play in my opinion.

See, the risk profile is similar in both—in diversified, the risk is spread across a larger number of stocks, while in a concentrated portfolio, the risk is focused on a few stocks. For the same amount of money invested, the quantum of risk remains the same in both approaches. However, the payoff, in case one is correct in the stock picks, is quite asymmetric and that is the way I choose to play it. There may be differing views on this but this is the way I see it. In a concentrated portfolio, I would be buying a few of my best picks, while in a diversified portfolio I would be buying many, not necessarily my best picks. I reckon the chances of my going wrong with a wider list is greater than a small, focused list.

So, readers, you can think of perhaps adding to your existing counters (assuming that you are bullish about them even during the current dip) than seeking out new ones. After all, if you wish to continue to hold your stocks, you have continuing conviction in them, right? Then, doesn’t it make sense to put more money into them than chance your arm with something else? You can buy another one only if it seemingly presents a better opportunity to profit than the one you are holding. If so, then why hold the first one at all?

Just points to ponder.

Now, here is another chart to look at (Nifty vs Smallcap index).

In a month-or-more-long decline where the index dropped 40% of the prior rise, one would have thought that the small caps would have taken a severe knock. But the chart here tells a totally different story.

The Nifty has dropped far more than the small-cap index in the last month or more. This clearly demarcates the impact of FPI selling vs retail buying. Evidently, retail trade is unwilling to let go of their longs built over time. This reveals a high sense of confidence in the market trend with the sentiment holding up quite well despite consistent selling by the FPIs. Quite a change, that. Correlation rules may have to get rewritten here—just like it is being done in several areas of the market.

This possibly also explains why the mood is still quite upbeat, and how there was a literal scramble to get back into active small and mid-cap names when the market revived on Friday.

The results flow will continue to throw up a lot of new names (with some biting the dust too, for sure) and since many of those don’t belong to any index, the market trends may continue to remain lively without indices performing any great shakes. That is also something to watch out for ahead.

In fact, in my experience, those are the best times for retail players—the indices (and large caps) remaining steady while the other part of the market takes off. That is often party time. But for this to happen, the overall results have to really surprise the market yet. Let us see if some such thing happens.

Winding up, something to look forward to, after having experienced declines for about a month or more. I wrote a while ago that I had squared a lot of longs but I have now re-entered the market with some trial long positions.

November promises to be a better month compared to October and here I would be inclined to buy dips through the month rather than attempt to short rallies. So, that is a total change in strategy, one that may please be noted. Initial expectations are not too high for Nifty targets but I would rather let the progress of the trend dictate the changes in targets, if any. For the four weeks ahead, be buyers during dips.

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 BQ Prime or its editorial team.