Nifty In Technical Charts: Look Before You Leap

Was so much action warranted? For those where a 50-point move matters, yes, it was warranted. But in these columns, we are not exactly catering to such players. This is a weekly column and hence looking at markets from a slightly longer perspective. For such players, running around was not warranted. Agreed, that the drop was scary but playing with levels and analysis based approach means that we have to take such sudden occurrences in our stride as our levels provide for such events.

In the last week's letter, I had given a chart of the daily Nifty future with a fresh pitchfork added. I had indicated in that letter that the updated stoploss zone for traders is at 21,050 (the median line of the pitchfork). The sharp drop brought Nifty futures down to 21,316, far above the danger levels. This stoploss level (for swing traders) updates to around 21,080-150 levels for the coming week. Chart 1 shows the updated chart.

In the last week's letter, I had also mentioned that valuations (said to be out of whack) need to be read along with sentiment and liquidity. I don’t believe liquidity is going to be affected in any way for now, but the sentiment may be a bit shaken as the fall was more than what most people anticipated and was also swift.

But the swiftness is the key element, as such falls lead to quick liquidation of leveraged longs, emptying the market of stock overhangs for the near term. Could that have happened here? The month, for example, started with a large long position in index futures and as of the weekend this had drawn down to around 50:50 ratio for longs and shorts. That implies long liquidation as well as creation of new shorts. With the fall, however, the VIX dropped some. So, those that had gone long puts to protect seem to have used that card to cash in.

The prices broke the most recent swing low and that induced some scare among players who follow swing charting. Ideal stop is two swing lows behind and that continues to remain at 21,060. Uncomfortably far, like I said earlier, for those that look at 50-100 point moves in the Nifty but the logical swing-based stop for swing traders.

But some smoke signals are sent out as of last week. It is not as though we were not prepared for this—remember the red/amber flags that were raised in the last week letter. I also specifically wrote: “We are nearing there, so keep your guard up!”. Time factors were mentioned, that price targets were nearing as was the time count. One of the ideal things to do at such times is to take some money off the table wherever you are seeing some. It was not a call to exit the market and it still is not, as the first of the swing trading stop is not hit. Will we not surrender some of the gains waiting for that stop level to be hit? Of course, yes, but that is the price to pay for tracking a strong trend and we have to be ready to pay it. So far, we have not been called upon to do so.

I had also mentioned other factors to watch out for. I reproduce that para here again for readers to keep note of: “But be alert to not-so-overt signals of a flip over like good news not propelling trends higher (after numbers now), prices not coming back from reactions (like they used to) or some volume led declines during reactions (hitherto not seen)”. To that list, you can now add, watch the gap zone of Tuesday (21,850) and check whether that gets traded into. If it doesn’t, then the market lacks buying power and, therefore, is likely to pull back to test the supports once again. If you are still feeling bullish about the market, then prices must trade beyond and into the gap zone, filling it. Only then it will have a chance to continue higher.

Also, look for rallies to become longer in time than the corrections. Currently we had three sessions of declines. So, look for rallies to be more than three sessions. Currently done two. It is possible that we may get into some consolidation here too, with some alternating moves up and down as the market digests new information of Q3 numbers. They have been a mixed bag so far. Chart 2 is pointing to a ranging possibility.

Chart shows daily Nifty with Ichimoku lines with prices between TS and KS lines and CS lines heading into prices. The three DI lines are getting clustered near one another. All these are classic indicators of a range emerging ahead. Cloud is comfortable distance away and three of the Ichimoku lines are above it too. So, no worries on the trend either for swing players. Unless some sharp moves occur, it is unlikely that any bearish patterns can be established on the ADX indicator chart. These support a ranging but continued bullish situation in the Nifty.

Therefore, there should be no sense of panic. Sentiment will also remain upbeat owing to the Ram Mandir factor next week. It is a truncated week with two holidays, so no big opportunity to trend much. That too may add to the ranging possibility. Market men will be looking at numbers from big names to move the sentiment needle, so do track those without fail and check the market response to them. HDFC Bank reeled and tried to take the market down with it. So far, IT has been up to the challenge—but that is only because of low expectations. Hindustan Unilever disappointed. Reliance numbers were already anticipated to a good extent, it seems. Now other big banks and pharma names will be a focus. Not much is expected from FMCG majors so there could be some room for surprise there.

In sum, stock-specific nature of the move will drive the trends. It will, therefore, be a time to pick and choose. For sure, positive surprises will be well rewarded (OFSS is a good example) but results would have to be howlers for any sharp crack. Numbers that are short on expectations could see a limited 5-6% type of selling.  So, a guarded approach is advisable.

Hence, look before you leap next week.